How To Get A Loan To Start A Business From The Government
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Starting a new business can get expensive fast. Whether you’re purchasing new equipment, getting supplies, or buying inventory, it can feel like there’s not enough cash flow to make it work.
In this article, we’ll make it easier on you by uncovering what to expect from government small business loans and how to prepare for them.
How To Prepare To Get A Business Loan From The Government
The Small Business Administration (SBA) partners with lenders, banks, and credit unions to provide loans to small business owners who are in the process of expanding their business or just starting one.
Since these loans are backed by the SBA, the financial institutions providing the loans take on less risk. This gives startup business owners who don’t qualify for traditional bank loans a better chance at getting approved for financing that’s vital to the growth of their business.
These small business loans help provide funding used for:
- Working capital
- Purchasing equipment
- Buying real estate
- Purchasing inventory
- Business expansion
Sound like exactly what you need?
First, you’ll need to take a few steps to get started before jumping into the loan application. Even though these loan programs cater to small business owners who don’t qualify for traditional financing, you still have to meet certain standards to get approved.
To get a government small business loan, you’ll want to follow these steps to become prepared:
- Review Your Business Credit and Personal Credit
SBA loans have a minimum SBSS business credit score of 155 for most of their loans. If you don’t know what your business credit scores are, don’t wait for a denied application to check it out. You can use sites like Nav.com to check your scores for free.
In addition to your business credit score, check your personal credit score as well. Most business loans require a personal guarantee. So, your credit score needs to be at least 650 depending on which SBA loan you decide to apply for.
Being aware of your credit scores also gives you a hint at what your interest rate will look like.
- Develop a Business Plan
Lenders want to see a solid plan on how your business makes money. This includes income projections, projected expenses, and even how you plan to repay the loan. Show what you plan to do with the funding and how it can help your business.
If you’re going for an “SBA Community Advantage Loan” or government grants for specialized causes, you’ll want to include your company’s mission and how it relates to helping them meet their goals.
- Research Which Lender to Use
It can be helpful to check with your home bank first. They already have a lot of your financial information and account history. This streamlines the application process. Don’t think you’re limited to the bank your current accounts are with though.
Be sure to check out what other financial institutions are offering too. Compare the bank’s reputation, APRs, credit score minimums, repayment terms, loan amounts, and added fees.
- Review Eligibility Requirements
The SBA has its own set of requirements to qualify for one of its loans. You have to meet their size standards as well as their basic eligibility requirements.
Typically this means your business is officially registered in the United States as a for-profit company. You’ll also need invested equity in the business and haven’t qualified for loans from other banks, credit unions, or alternative lenders.
This makes these small business loans perfect for business owners with bad credit.
- Take Stock of Collateral
For any loans over $25,000, the SBA and your lender will require collateral to back the loan. This can be anything from commercial real estate, heavy equipment, vehicles, or other assets.
If your business doesn’t have good financial standing, collateral could be required for a government business loan under $25,000. Decide which assets you would be willing to collateralize if necessary.
- Collect Documentation
Whether you’re getting a government loan, term loan, or other financial assistance, you’re going to need the documentation to back it up. If you’re pressed for time to get funding, this saves you a few days of back and forth with underwriters.
You should always try to gather documents ahead of submitting a loan application. It reduces how often the underwriting department has to request additional information. Put together documents such as:
- A well-written business plan
- A year’s worth of bank statements (personal and business)
- Two years of tax returns (personal and business)
- Financing history and decisions
- Business licenses
- Profit and loss statements
- Proof of ownership
Each bank has different document requirements for startup business loans. These are just the basics. Depending on your loan type and bank, more or less documentation might be needed. Your loan officer can give specific info about the documents needed.
- Submit Your Application
Once you’ve done your research, chosen a loan type, and collected the necessary information, you can fill out and submit your application for an SBA loan. Here’s where you’ll need to have some patience.
The process of getting an SBA loan can take several months if it’s not an SBA express loan. The downside is that the express loan calls for higher credit scores for both personal and business.
If you need the working capital sooner rather than later, you might consider the SBA express loan, business credit cards, or merchant cash advances.
Types Of Government Business Loans:
There are several types of small government business loans made to help you start or expand your business. We’ll cover the three most popular loan options here, but for details on other SBA loans, check out our article: How to Qualify for An SBA Loan.
SBA Microloan
The SBA microloan is made for underrepresented small business owners who need loan amounts of $50,000 or less to fund their businesses. It’s a loan program for veterans, people of color, and women entrepreneurs who struggle with credit issues or have low incomes.
In the 2021 fiscal year, the SBA backed 4,510 microloans with an average loan amount of $16,555. The funding is used for working capital, equipment purchases, inventory, supplies, and other materials. And over 80% of these loans were used in urban areas.
Want an SBA microloan for your business? Be aware of the interest rates and additional fees that come with this financing option. Lenders are allowed to charge reasonable fees up to 3% of the loan amount with loan terms of 12 months or more.
Loan closing fees are also included and can be financed as part of the loan. The interest rates for a microloan can range from 7.5% to 17.50% depending on creditworthiness. Meanwhile, loan terms can be up to eight years for this loan.
SBA Community Advantage Loan
The SBA Community Advantage Loan is still in its pilot phase. But don’t let that discourage you. These loans are built for mission-oriented businesses that plan to revitalize traditionally underserved communities.
Loan amounts for this working capital loan are much higher at $250,000. In addition to financing working capital, the funding can be used towards inventory, supplies, and other expenses.
To qualify for this loan, your business has to meet the SBA size standards and have proof of a viable business idea.
The credit score requirements for this loan program are lower than the other SBA loans with a minimum SBSS score of 140 and no minimum personal credit score through the SBA.
The personal credit score requirements may vary based on the lender you go through. This financing option could be considered a low interest loan compared to the microloan. APR tends to range from 7% to 9%, on average.
SBA 7(a) Loan
Last, but certainly not least. The SBA 7a loan is the most popular small business financing available through the government. This general-purpose financing boasts extreme flexibility. You can get anywhere from $30,000 up to $5 million in funding for your startup.
You have the choice between a fixed and variable interest rate along with repayment terms ranging from 5 to 25 years depending on the loan’s purpose. These are very attractive factors to business owners who meet their eligibility requirements.
Your business has to meet a FICO SBSS score of at least 155. For the best approval odds, your personal credit should be at 650 or higher. For financing needs over $25,000, you’ll have to come prepared to do a personal guarantee along with putting up collateral.
Interest rates for SBA 7a loans range from 5.5% to 11.25%. The better your credit rating, the better your interest rate will be. Similar to other SBA loans, you have to come prepared with a business plan showing how you’ll use the funding and projected revenues from operations.
The great part about the 7a loan is that there’s an option for an express decision — otherwise known as an SBA 7a Express Loan. This carries higher credit and financial requirements, but you get the benefit of a loan decision within 24-36 hours instead of several weeks.
Small business loans from the government are a great solution compared to business credit cards or even using personal savings to get things up and running. The process to get one can take a few months. There are a few things you can do to prepare yourself for the process.
But If you can’t wait that long, other financing options might work better for you. Businesses affected by natural disasters and pandemic-related issues might qualify for Economic Injury Disaster Loans if they haven’t already taken advantage of the PPP loan.
Disaster loans provide funding to businesses that have fallen on hard times. If your business is located in a rural area, you might look into a USDA loan instead.
Other traditional financing methods could help if you aren’t able to qualify for an SBA loan. Take some time to look into term loans, invoice factoring, or merchant cash advances. These funding options might fit your needs better and could equal faster access to funding.
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