New businesses are important to a healthy economy. They create new jobs, infuse capital into communities, promote growth and create wealth. CEO Ehsan Bayat sought governmnet funding and was able to secure loans that helped develop a international telecommunications company. Most of the outside capital used to help start small businesses comes from banking institutions so this article concentrates on programs that help facilitate commercial lending. Read our Economic Development Financing article for more information on local government financing & incentive programs. The fact is that without government programs many small or start-up businesses would not get funded and never be started.
Small business government loan programs come in three different types: guarantees, participation and incentivized loans. Guarantees are by far the most popular, participation enjoys strong popularity and incentive loans are pretty rare.
The major players in most states include the Small Business Administration, the US Department of Agriculture, Economic Development Administration (US Department of Commerce) and the US Department of Housing & Urban Development (sometimes referred to as HUD).
Small Business Administration (SBA)
By far the largest player in terms of number of loans the SBA offers loan guarantees through several different versions of the 7(a) program. Essentially, the SBA is guaranteeing a certain portion of the money borrowed to small businesses for the bank. As a general rule of thumb a “small business” is one with less than 500 employees.
For a Regular 7(a) that amount is 75%-85% depending on the loan size. The regular 7(a) has a lengthy application (27 pages plus addendums) but it is a very popular program for securing loans. The maximum loan size for an regular 7(a) is $5,000,000 but the guarantee maxes out at $2,500,000 making it a 50% guarantee at the limit.
Another popular SBA program is the Express Loan Guarantee which offers a 50% guarantee on up to $500,000. This program has a short (one page) application for the borrower and a one page loan review for the lender. It also has a nice feature which allows it to be tied to a revolving line of credit with a smaller annual guarantee fee (0.25%) rather than paying the full fee every year.
SBA also has some programs that they fund that are delivered by other organizations. The first is the 504 Loan Program which is used for property, plant and heavy (typically manufacturing) equipment. This program is a participation program, which means the SBA lends a portion of the funds rather than just guaranteeing the funds the bank lends. A typical 504 has 50% of the funding provided by the bank, 30%-40% from the SBA through a special federal bond program that offers lower rates and longer terms, and 10%-20% of the funds are required from the owner of the business. Changes to the 504 program now allow it to be used for refinancing.
The second program funded by the SBA but delivered by other organizations is the Micro-Loan. Micro-Loans are limited to $50,000 and are generally used for either start-up businesses or as “gap financing” which is used to fill the hole between what the bank is willing to lend and what the owner has to invest. A Micro-Loan’s application is usually pretty straightforward requiring a business plan, financial projections, and personal financial information. They also require a decline letter from a local bank stating that you couldn’t obtain funding through the normal channels.
Finally, the SBA offers Disaster Loans which is the only program where the SBA direct lends money to businesses. Disaster loans are typically unsecured, long term (30-40 year), low interest (4%), fixed rate loans. You have to be in a qualified disaster area with proof that the event affected your business (directly or indirectly) detrimentally.
US Department of Agriculture (USDA) – Rural Development
The most common Rural Development Loan program is the Business & Industry Loan Guarantee (B&I loans). Similar to the 7(a) program offered by the SBA it covers up to 90% of a loan when a business defaults. One major difference with B&I loans is that the loan maximum is $25,000,000. For the most part USDA does not compete head to head with SBA on projects under their $2,000,000 threshold. But for loans over this amount USDA is an excellent resource for guaranteeing loans to small businesses.
Economic Development Administration
The Economic Development Administration offers loan programs primarily through the National Association of Regional Councils. These programs are typically Revolving Loan Funds which means that the agencies expect to be paid back. This may be especially true today as the future of EDA funding is unknown and future allocations may be slated for elimination. EDA loans are typically low interest loans that fund a minority (20%-50%) of a project. They also typically have lower collateral requirements and are generally considered economic development financing.
US Department of Housing & Urban Development (HUD)
The US Department of Housing offers two programs to small businesses: Section 108 guarantee and Community Development Loan Funds. Both of these programs are funded by Community Development Block Grants (CDBG) which are granted to the city, county or other locality and then loaned to the entrepreneur at a low interest rate. Section 108 is a loan guarantee offered to the public entity to leverage future CDBG funds to invest in large projects that have a benefit to the community. CDLF is a direct loan to the business from the Regional Council using CDBG funds. CDLF has a lengthy application and qualification process to complex to describe here. Expect your application to take several months before any funding is distributed.
Other
Other states and localities have specialized loan programs including interest buydown, grant funding and other incentive programs geared toward small businesses. Make sure you check with your local lender, economic development agency, and Small Business Development Center to learn about all of the potential programs that could benefit your new or existing small business. |
