Do you want to learn how to access low-interest rate government loans such as SBA loans? Then below is an in-depth guide on how to apply and get government loans for your small business. These are loans with a government-backed guarantee. Like most bank loans, they can be tough to get, and the process can be frustratingly long. But the repayment conditions are usually very friendly.

An example of a government loan program, and in fact the largest in the world is the Small Business Administration (SBA), a united states government agency that provides support to entrepreneurs and small businesses by giving them easier access to capital.

Although they are called government loans, these loans are technically not issued by the government agency in charge. Rather, the agency backs loans and promises to pay them in case of default, giving banks some comfort room to approve loans or allow borrowers to repay loans over a long period of time. So, in reality, these loans are issued by banks.

Why Apply for SBA Government Loans?

As a matter of fact, in the United States, the Small Business Administration has several loan programs that make funding available to small enterprises who are unable to secure loans from lending institutions on their own. It should be noted that small businesses cannot apply for loans from the SBA except they are unable to get funding from elsewhere.

It is on record that a number of Fortune 500 companies in the United States benefited from SBA loans when they were just starting out. Big corporations like FedEx (Federal Express), Apple and Intel among others leveraged on these loans. These organizations’ success, and of course the trend toward small-business start-ups and entrepreneurship in America has encouraged both the SBA and its lending partners to continue to expand their loan programs.

Research shows that in fiscal year 2005, the SBA made or guaranteed $19 billion worth of loans to small enterprises all across the United States of America, the largest in recent time. Loans were provided to more than 80,000 small companies and 28,000 of them were start-ups.

Who are Those Qualified for SBA Guaranteed Loans?

In their official page, the US Small Business Administration defines businesses eligible for SBA loans as those that: operate for profit; are engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and use alternative financial resources (such as personal assets) first.

In addition, to secure SBA assistance, a company must qualify as a “small business” under the terms of the Small Business Act. That legislation defined an eligible small business as one that is independently owned and operated and not dominant in its industry.

Since the passage of the Small Business Act, the SBA has developed size standards for every industry to gauge whether a company qualifies as a “small business” or not. Size standards are arranged by Standard Industrial Classification (SIC) code, but in general, the following guidelines apply for major industry groups:

  • Manufacturing

A key criterion for manufacturing establishments is the size of their work force. Generally, 1,500 employees is the cut-off point for SBA consideration, but even establishments that have between 500 and 1,500 employees may not qualify as small businesses; in such instances the SBA bases its determination on a size standard for the specific industry in which the business under consideration operates.

  • Wholesaling

Generally, wholesale establishments seeking SBA financial assistance should not have more than 100 employees.

  • Retail and Service

Financial information is the key consideration here; ideally, retail and service industry businesses seeking SBA assistance should not have more than $3.5 million in annual receipts, although the requests of larger establishments are considered (depending on the industry). Establishments engaged in construction or agriculture industries are also evaluated on the basis of their financial reports.

Still on their page, the Small Business Administration also considers other factors in determining whether an establishment qualifies as a small business. For example, if a business is affiliated with another company, the owners must determine the primary business activity of both the affiliated group and the applicant business before submitting a request for SBA assistance.

If the applicant business and the affiliated group do not both meet the SBA’s size standard for their primary business activities, then the loan request will not be considered. The SBA also has a number of eligibility rules that apply to specific kinds of businesses. Franchisees, for example, are often favored by the SBA because their businesses enjoy a higher success rate than do other businesses.

Nonetheless, SBA officials will examine a franchisee’s franchise agreement closely before extending any loan guarantees to him or her. If the officials decide that the franchisor wields so much control over the franchise’s operations that the franchisee is basically an employee, then the SBA will turn down the request.

Other types of businesses such as those in agriculture or the fishing industry, are free to apply for SBA assistance, but they are directed to first look to government agencies that deal directly with their industries.

How Do SBA Loans Work in the United States?

Getting first-hand information on how SBA loans work in the United States of America is the first step an aspiring entrepreneur takes when seeking to finance his or her business. This is so because the United States Small Business Administration (SBA) is a major source of financing for entrepreneurs especially those that operate small businesses.

Let’s get it straight, the US Small Business Administration does not make direct loans to small enterprises but rather, the SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro-lending institutions). The Small Business Administration guarantees that these loans will be repaid by the borrowers, hence eliminating some of the risk to the lending partners.

Just look at it from this angle for better understanding, when an entrepreneur or enterprise applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small enterprise if the business owner has the collateral cum requirements to access other loan opportunities. SBA loan guaranty requirements and practices can change as the government alters its fiscal policy; hence, you can’t rely on past policy when seeking assistance in today’s market.

  • SBA Guarantee

The SBA can guarantee as much as 85 percent of the loan proceeds, so while the lending institution will have some risk, it should also be willing to take on more risk than with conventional loans. One of the good things about SBA loans is that an enterprise can access loans as large as $5 million and most SBA loans are through banks.

You can ask your bank whether it makes SBA-guaranteed loans, or you can go to the SBA website for a list of participating lenders. So also, the SBA has a micro – loan guarantee program for loans of up to $50,000. These loans are provided through non – profit community-based organizations.

  • SBA Paperwork

SBA loans typically take extra time and extra paperwork, although the SBA also has programs for express loans with shorter forms. You can expect to sign a personal guarantee, and you will generally be expected to have some collateral.

You may not get the entire loan at once; instead, you may get it in parts, such as after supplying invoices. The interest rate here may be higher than a conventional loan. You may pay extra fees such as a guarantee fee and a servicing fee, both based as a percentage of loan proceeds, on top of interest costs.

  • SBA Surety Bond Guarantee Program

In addition to loan programs, the SBA offers the Surety Bond Guarantee (SBG) program, which aids small business contractors who cannot find surety bonds through regular commercial channels.
You may begin to wonder what a surety bond is?

A surety bond is a three-party instrument among a surety (someone who decides to be accountable for the debt or obligation of another), a contractor, and a project owner. The SBA’s assurance gives sureties an encouragement to deliver bonding for eligible contractors, thereby firming up a contractor’s knack to gain closeness and greater right of entry to contracting opportunities for small businesses.
 SBA can promise bonds for contracts up to $5 million.

  • SBA Business Investment Company

Lastly, the SBA backs a venture capital program, such that SBA’s Small Business Investment Company (SBIC) program is a public-private investment partnership shaped to help block up the gap between the accessibility of growth capital and the needs of small businesses. Please bear in mind that the SBA does not capitalize directly on small businesses, instead they trust the expertise of qualified private investment funds.

The SBA certifies these funds as SBICs and supplements the capital they raise from private investors with access to low-cost, government-guaranteed debt. With these two sources of capital supporting them, SBICs search across the U.S. for promising businesses in need of debt or equity financing.

SBICs are comparable to other investment funds in terms of how they function and their hunt for high returns. However, unlike other funds, SBICs limit their investments to qualified small business concerns as defined by SBA regulations.

Types of SBA Small Business Investment Loans

There are different types of Small Business Investment loans that are classified under the 7A SBA guaranteed loan program and they are;

  • CAP – Lines
  • Low – Doc (The Low Documentation Loan (Low – Doc) Program)
  • SBA – Express
  • EWCP (The Export Working Capital Program (EWCP) Program)
  • DELTA (The Defense Loan and Technical Assistance (DELTA) Program)
  • Micro – Loans
  • International Trade Loan (ITL)
  • Pollution Control Program
  • The 504 CDC (Certified Development Companies) Program
  • Disaster Assistance Loans

What’s the Interest Rate on SBA Loans?

A report published by the Small Business Administrative, shows that fixed rate loans are not allowed to exceed the prime rate plus 2.25 percent if the loan matures in less than seven years. If the maturity of the loan is seven years or more, on the other hand, the rate can be boosted up to the prime rate of plus 2.75 percent.

For SBA loans totaling less than $25,000, the maximum interest rate cannot exceed the prime rate of plus 4.25 percent for loans with a maturity of less than seven years (for loans that mature after seven years, the interest rate can be as much as the prime rate plus 4.75 percent).

For SBA loans between $25,000 and $50,000, maximum rates are not permitted to exceed 3.25 percent (for loans that mature in less than seven years) and 3.75 percent (for loans with longer terms of maturity).

The report also shows that variable rate loans under SBA guaranteed loans may be pegged to either the SBA optional peg rate or the lowest prime rate (the optional peg rate is a weighted average of rates that the federal government pays for loans with maturities similar to the average SBA loan).

Under variable rate loan plans, the lender and borrower negotiate the amount of the spread to be added to the base interest rate. Such agreements also provide for regular adjustment periods wherein the note rate can be changed as needed. Please note that some agreements call for monthly adjustment periods, while others provide for quarterly, half – yearly or annual adjustments.

How to Apply & Get Government (SBA) Loans for a Small Business

Like other lenders, the government-backed business loan program takes significant risk on you as a small start-up business. For this reason, they want as much assurance as possible that they are not making a wrong decision by granting you a loan. So, your loan application should address their concerns as much as possible. Here are the steps you should follow when applying for a government-backed business loan:

1. Know what you have

Just as there is the SBA in the United States and YOUWIN in Nigeria, there are government-backed business loan agencies in other countries, too. You will need to find out if your Federal or State government has any such loan program. If none is available in your state and country, then a government loan can’t be on your list of financing options.

2. Do your homework

You will need to address all the issues that the government loan agency would look closely at (same as those explained earlier in the chapter under “How to apply for a bank loan”) before approving or denying your loan request.

In addition, however, the SBA has a program that helps U.S-based entrepreneurs develop strong business plans. So, when writing your business plan, you can use a business plan developed with SBA assistance as your guide. (The business plan guide in this e-book would suffice, though).

3. Choose a suitable loan option

Probably by speaking with a representative of the SBA (if you are in the U.S.) or your government’s loan agency (if you are outside the U.S.), you will need to find out which loan packages or programs are available.

Learn which of these programs apply best to your business and take advantage of any that addresses your industry or circumstances. Some loan programs prioritize certain businesses, so consider opting for loans that have been tailored to your business.

The SBA’s primary lending program is the 7(a) Loan Guarantee Program, which guarantees as much as 85 percent of loans up to $150,000 and 75 percent of loans of more than $150,000. The maximum loan amount under this program is $5 million. Other loan programs offered by the SBA include the 504 Fixed Asset Financing Program and the MicroLoan Program.

4. Obtain and fill your application

You need to obtain a loan application form and fill it carefully. If necessary, you can get help from an expert or an official of your government loan-issuing agency. The SBA offers assistance in the application process. Applicants are directed to furnish basic information about themselves and their businesses, including:

  • Personal information (full legal name, street address)
  • Basic business information (employer ID number, type of business, number of employees, banking institution used); names and addresses of management personnel
  • Estimated business expenditures and costs (including details on the SBA loan request)
  • Summary of collateral
  • Summary of previous government financing
  • And listing of debts

The SBA loan application form also provides a complete listing of the various other items of information that must be provided for a business’s application to be considered. These include a personal history statement:

  • Personal and business financial statements
  • Business description
  • Listing of management personnel
  • Equipment list
  • Cosigners
  • Summary of bankruptcies, insolvencies, and lawsuits (if any)
  • Listing of any familial relationships with SBA employees
  • Subsidiaries, either proposed or in existence
  • Franchise agreements
  • And statements of financial interest in any establishments with which applicant business does business, if applicable

5. Prepare other needed documents

You will also need to prepare the supplemental forms as well as all documents you are required to attach along with your application. For SBA loans, the following supplemental forms must be filled and submitted:

  • Form 4 (Application for Business Loan)
  • Loan Repayment Statement (a brief statement indicating how you will repay the loan and how soon)
  • Form 4-a (Schedule of Collateral—Schedule A)
  • Form 413 (Personal Financial Statement)
  • Form 912 (Statement of Personal History)
  • Form 1624 (Certification Regarding Debarment, Suspension, Ineligibility, and Voluntary Exclusion Lower Tier Covered Transactions)
  • Form 1846 (Statement Regarding Lobbying)

Other documents usually required by government loan agencies include franchise agreement, purchase agreement, articles of incorporation, copies of licenses, letters of reference, partnership agreement, and so on.

6. Write your executive summary and cover letter

Your executive summary must summarize what your business is all about as well as your reasons for requesting the loan. Some government programs (such as the SBA) require a business profile. Your business plan will act as one.

7. Review and submit your application

After filling the application form, you need to review and proof your application. Unpardonable errors can blow your chances of getting the loan, so take your time to weed them out. After review and proofing, you can then submit your application.

Bottom line

Although getting a loan is not easy, by adopting the tips in this chapter, you will have greater chances of success. Generally, existing businesses are favored by banks, while startups are favored by government-loan agencies; but this isn’t etched in stone.