Get a Government Business Loan

Government loans (federal, state and local) are available to assist businesses get up and running, or expand. Probably the best known government lending agency is the U.S. Small Business Administration (SBA). The SBA doesn’t actually make direct loans to businesses. Rather, it works with lending institutions, and guarantees that loans will be repaid. Understand, too, that these loans will require the borrower to provide collateral, which may include personal assets. This article will deal primarily with SBA requirements, but the information should be useful for any government loan you may choose to apply for.

Steps

Discovering the Type of Loans Available

1. Pinpoint your reasons for seeking the loan. Why you need the loan will determine the type of loan you may qualify for. Loans guaranteed by the Small Business Administration apply to situations such as:
   • Purchase of new equipment, machinery, parts, supplies, etc.
   • Financing leasehold improvements
   • Refinancing existing debt
   • Establishing a line of credit
   • Disaster assistance.
2. Check http://www.sba.gov to see the different loan programs offered by the SBA. The most common programs are:
   • 7(a) Loan Guarantee Program. Geared mostly to helping small businesses start or expand their services. The maximum loan amount is $5 million. 7(a) also includes certain specialty programs, such as:
     • a CAPLines program designed to help small businesses meet their short-term and cyclical working capital needs
     • Small Loan Advantage program, which allows you to get pre-qualified by the SBA for a loan up to $350,000. This speeds up the approval process.
   • MicroLoan Program. Mostly used for short-term purposes, such as purchase of goods, office furniture, transportation, computers, etc. The maximum amount is fixed at $50,000.
   • 504 Fixed Asset Program. Offers fixed-rate and long-term financing. The loans are aimed at companies whose business model directly benefits the community (providing jobs or bringing needed services to an underserved area). The maximum amount is $5 million.
   • Business Disaster Assistance. Used for the repair or replacement of real estate, inventories, machinery, equipment and all other physical losses. The law limits business loans to $2 million, but the loan can’t be for more than the amount of the verified uninsured disaster loss.
3. See if there’s a particular government department or agency that regulates your industry. If there is, it may have loans available for various reasons. For example, the U.S. Department of Agriculture offers loans for establishing, improving, or expanding farms or ranches.
4. Go online to your state or local government’s official website. Many state and local governments offer loans or other business incentives to help start-up businesses, to attract businesses, or to keep businesses from moving out of the area. The programs and requirements are normally listed in the business or commerce sections of the government website.
5. Make sure you’re eligible for the loan. Government loans have eligibility requirements. Each type of loan has its own guidelines. For example, some of the basic qualifications for an SBA 7(a) loan are:
   • Operate the business for profit
   • Be small, as defined by the SBA (This is usually based on revenues or number of employees.)
   • Be engaged in—or propose to do business in—the United States or its possessions
   • Use alternative financial resources, including personal assets, before seeking financial assistance
   • Be able to demonstrate a need for the loan proceeds
   • Don't be delinquent on any existing debt obligations to the U.S. government.

Preparing for the Loan Application

1. Be ready to submit a resume and personal background information. A resume will provide the lender with evidence of your management or business experience. This is usually necessary for loans intended to start a new business. Lenders will probably also ask for personal information, such as previous addresses, names used, criminal record, and educational background.
2. Gather income tax returns, financial statements, and bank statements. Many loan programs require:
   • Personal and business income tax returns for the previous three years
   • Signed personal financial statements for owners with more than a 20 percent interest in the business
   • One year of personal and business bank statements.
3. Make sure you have a business plan. Loan programs require a solid business plan to be submitted with the loan application. The business plan should include a company overview, industry analysis, marketing plan, and a complete set of projected financial statements, including profit and loss, cash flow, and a balance sheet. You can find business plan templates online.
4. Check your personal and business credit status. The lender will probably obtain a personal credit report for you (as the business owner). But the lender will most likely also want a business credit report, which you may have to get yourself. You can do this through business credit reporting services such as Dun & Bradstreet.
5. Have legal documents available. Your lender may require that you submit certain legal documents, if applicable, such as:
   • Business licenses and registrations required for you to conduct business
   • Articles of Incorporation
   • Copies of contracts you have with any third parties (such as suppliers)
   • Franchise agreements
   • Commercial leases.
6. Ensure you’re up-to-date with your taxes. The SBA and the bank are going to want to know that your federal and state business and personal tax obligations are current. This obviously reflects on your trustworthiness as a loan applicant.

Applying for the Loan

1. Find an SBA preferred lender. Since the SBA doesn’t make loans directly, you’ll have to deal with a bank or other lending institution (like a credit union). The SBA designates certain lending institutions as “preferred lenders”. The SBA gives these banks control of loan approval and most loan servicing. This allows them to make loan decisions more quickly. Check SBA for lenders, and/or look into banks in your area to see which participate in the Preferred Lenders Program.
2. Meet with the lender. When you sit down with your lending institution’s representative, be sure to dress professionally. Appearance matters.
   • Have two copies of your business plan available, including financial projections.
   • Be prepared to answer any questions regarding your business.
   • Assuming the lender is comfortable with you as a potential applicant, you'll be given an SBA Loan Package. This includes forms required by the SBA and the lender.
3. Complete the application form thoroughly. Missing information will not only delay the approval process, it also will reflect poorly on you as a loan candidate. Each bank has its own application form. However, some of the items you’re likely to encounter are:
   • Business information and history. This includes address, contact information, and type of business entity (such as corporation, partnership or LLC). It also addresses ownership structure (principals, their titles and ownership percentage).
   • Business background information. The bank is interested in facts such as:
     • The type of services or products the business provides
     • Your vendors, suppliers, and major customers (especially customers that may account for more than 30% of your annual revenue)
     • Names and locations of your primary competitors
     • The risks in your industry—and how you protect against them
4. Be prepared to provide collateral and personal guaranties. Adequate collateral is required as security on all SBA loans (to the extent that assets are available). Additionally, personal guaranties are needed from everyone who owns 20 percent or more of the business, and from other individuals who hold key management positions. The SBA may also demand that the personal guarantors pledge personal assets as collateral.
5. Comply with the lender’s requests as soon as possible. During the course of the application process, the lender may need additional information. Delays on your part in providing this may lead the lender to believe you’re not serious about your application, or that you’re unreliable.
6. Find out the applicable fees. The type of fees you're charged for your loan will depend on the type of loan you get. Check with your lender for the amounts you will owe. You may be charged:
   • A packaging fee. This is for help from the lender or a third party in preparing the application. It must be based on an hourly rate, not a percentage of the loan.
   • A processing/application fee. This is to compensate the lender for credit and background checks. Most 7(a) loan programs are exempt from this fee.
   • An underwriting fee. This is for the lender's efforts in reviewing the loan documents and determining if you're an acceptable loan candidate. 7(a) loan programs are exempt.
   • Closing costs. This mostly relates to real estate transactions, and includes such things as attorney fees, realtor fees, and property title searches. You can only be charged fees directly related to your transaction, and the lender can't charge you for its in-house attorney's fees.
   • Maintenance or servicing fees. These are lender fees for services during the term of the loan (such as handling payments and sending out notices). Except in very limited circumstances, 7(a) borrowers can't be charged these fees.
   • SBA guaranty fee. The lender is entitled to be reimbursed by you for fees it has to pay the SBA. These fees are based on a percentage of the amount of the loan guaranteed by the SBA. (Usually between 2% and 3.75%.)
7. Sign the loan closing documents. If the loan is approved, the lender will contact you, and request that you come in to sign the final loan papers. Once you’ve done that, the lender will fund the loan. The lender will determine when and how the loan proceeds will be paid to you, subject to SBA guidelines. For example, 7(a) program loans can be paid in installments, provided all the proceeds are paid out within 24 months of the date of the loan approval.
   • Before signing,reviewing the loan documents. If possible, have a lawyer look over the loan document for you to make sure everything checks out.
   • Most importantly, you need to know your obligations and the consequences in the event that you default on the loan.
8. Consult with the lender if your loan is denied. Ask the lender's representative if there's anything you can provide that would change his or her mind. It's likely that the lender would already have requested any such information when reviewing the application, but there's no harm in asking. Plus, having this conversation may give you some insight if you decide to apply again in the future.

Tips

• The duration (term) of the loan depends on why the loan was taken. The SBA has established maximum loan maturities: 25 years for real estate, up to 10 years for equipment (depending on the useful life of the equipment), and generally up to seven years for working capital.
• The SBA doesn’t necessarily guarantee the entire loan. For example, the 7(a) loan program guarantees as much as 85 percent of loans up to $150,000, and 75 percent of loans of more than $150,000.
• If you’re applying for an SBA 7(a) loan—and the amount you’re seeking is less than $350,000—look into the SBAExpress Program. (This is not the same as the Small Loan Advantage program.)
• Military veterans may qualify for preferential treatment with the SBAExpress program, particularly with regard to up-front loan fees.
• If your business is minority-owned, the Small Loan Advantage program may be a good fit for you. Plus, the SBA’s 8(a) Business Development program can help you develop your business, and also provides access to government contracting opportunities.
• Get copies of your Read a Credit Report before applying for the loan. That way you can correct any errors before the lender runs the credit check. Obtain personal credit reports from all three major credit reporting services: Experian, Equifax, and TransUnion. You’re entitled to a free credit report from each of these providers every 12 months. Also, get your business credit report in advance, again to correct any errors.
• Consider getting assistance in preparing your business plan. This document is very important, and it may be worth having your accountant or attorney work on it with you, or at least review it.
• As a general rule, the SBA will not decline a loan where inadequate collateral is the only unfavorable factor in the loan process.

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