Getting Government Business Loans

Government business loans tend to increase during recessionary times. In order to help the economy out of a deep recession, the Small Business Administration (SBA) is taking unprecedented steps to make loans accessible to businesses through lending institutions. The SBA is guaranteeing a larger portion of 7(a) business loans. This will allow banks to lend to more businesses. There are some steps businesses need to take to get the SBA backed 7(a) loans.

Loan Requirements:

The SBA takes into consideration the following basic characteristics in businesses when deciding to guarantee a loan:

  • Repayment ability based on cash flow - primary consideration
  • Owners' good character - the principals of the business must have demonstrated a willingness to repay debts and be law abiding citizens
  • Management competency
  • Collateral
  • Owners equity contribution - 20% minimum required

Eligibility Criteria:

The SBA's eligibility criteria for government business loans are as follows:

  • Size - 7(a) small businesses are broadly defined as being predominantly operated in the US, not dominant in their field and independently owned and operated. Additional details are available on the SBA website.
  • Type of business - virtually all types of businesses engaged in for profit enterprises. There are some conditions and restrictions for certain business types.
  • Use of funds - may be for establishing a new business, to assist in the operation of an ongoing business, or the acquisition or expansion of a business.
  • Other criteria for special purpose loans - see the SBA website for more details.

The Process of Getting a Government Business Loan

Step 1 - Prepare a Package of Information Including:

  • Written loan proposal with a cover letter
  • Description of business including type, history, location, customers, suppliers and competitors.
  • Management experience detail including resumes of owners and key employees.
  • Personal financial statements of all owners including tax returns.
  • Loan repayment statement including cash flow schedule and budget.
  • Actual or pro-forma financial statements for business
  • Projection of future operations

Step 2 - Choose a Lender

The business should choose a commercial lender who participates in the SBA government business loan program. To find lenders who are government business loan participants, either visit a local SBA office, call or view the SBA web page on lender participants. Fill out the lender's application with the above package of information as supporting documentation for loan consideration. If the application is not strong enough, the loan will then be considered for an SBA loan guarantee. The lender will complete a "Lender's Application for Guaranty or Participation" form and submit it to the SBA.

Step 3 - Finalizing the Deal

Once all the paperwork has been submitted, the lender or the SBA may request additional information during the course of their review. Those questions may concern areas such as bill collection or inventory control or other issues of concern. Provide all information requested and answer all questions thoroughly.

After the loan has been approved, the business will be required to sign loan documents with the participating lender. The loan agreement will be subject to SBA general requirements and restrictions including:

  • Loan maximum of $2 million
  • Term of maturity restrictions - 7 years for operating funds and 25 years for real estate or equipment
  • Interest rate maximums related to the prime rate
  • SBA loan guarantee fees charged to lender and borrower
  • Provisions for pre-payment penalties under some conditions

Overall, getting government business loans backed by the SBA guarantee is a smart financial plan for many small businesses that would otherwise not qualify for a loan or may have to take less favorable terms.