If you’re starting a new small business, or need some capital to expand and make improvements on your current business, you'll probably start by seeking funds from banks and other commercial lending institutions, such as credit unions. In addition to these sources, the U.S. government has a variety of loan options available to small business owners who meet the lending criteria.

If you have difficulty getting a loan from traditional lending sources – or meet the special qualifications of the loans below – it's worth seeing whether any of the following federal alternatives would be the most cost-effective way to get your business the financing it needs.

7(a) Small Business Loan

The 7(a) Small Business Loan is the most basic and most common of the Small Business Administration's (SBA) business loan programs, this loan is named for a section of the Small Business Act that gives the SBA authority to back or guarantee business loans to American small businesses. The loan is only for for-profit businesses that cannot obtain regular financing from a bank, credit union or other lender, but can demonstrate ability to repay the loan.

The details. Loan eligibility criteria are based on the business’s income, debt, assets, etc., not the owner’s. The business must  use the loan funds solely for sound business purposes and not be delinquent on any debt to the U.S. government, like taxes.The maximum length of this type of loan is 25 years for real estate and seven years for working capital. The maximum loan amount is $2 million. For more information, see Expanding Your Small Business With An SBA Loan.

Business and Industrial Loans

Typically available only in rural areas, business and industrial loans aim to improve, develop or finance business, industry and employment, and improve the economic and environmental climate in rural communities. 

The details.To be eligible for this loan, a borrower can be an individual who is a citizen of the U.S. or a legal permanent resident alien; a cooperative organization or corporation with at least 51% ownership by a U.S. citizen, partnership or other legal entity organized and operated on a profit or nonprofit basis; an Indian tribe on a federal or state reservation or other federally recognized tribal group, or a public body.

Additionally, borrowers’ businesses must provide employment; improve the economic or environmental climate; promote the conservation, development and use of water for aquaculture; or reduce reliance on nonrenewable energy resources by encouraging the development and construction of renewable energy systems.

Interest rates may be fixed or variable and are negotiated between lenders and applicants. The maximum term for loans on real estate is 30 years. Loans for machinery and equipment cannot exceed the useful life of the machinery and equipment purchased with loan funds or 15 years, whichever is less. Loans for working capital can be for no more than 7 years. The maximum loan amount is $10 million – however, the Administrator may grant an exception of up to $25 to $40 million in certain circumstances.

Business Physical Disaster Loans

Business owners in a declared disaster area  may be eligible for financial assistance from the SBA to repair damage sustained from a recognized, eligible disaster. There are no size criteria, and most private nonprofit organizations may also apply to the SBA for a recovery loan after a disaster.

The details. To be approved, businesses must demonstrate a reasonable ability to repay the loan and other obligations from earnings. The interest rate is capped at a maximum of 4% if business owners cannot obtain financing elsewhere (as determined by the SBA). Loans to businesses and nonprofit organizations with credit available elsewhere will have a cap of 8%. The term of the loan can be up to a maximum of 30 years based on a business’s ability to repay the loan.

Certified Development Company (CDC) (504) Loan Program

The Certified Development Company (CDC) (504) Loan Program is a long-term financing tool for economic development within a community available to growing businesses. It provides long-term, fixed-rate financing for major fixed assets, such as equipment or buildings.

The details. Businesses must be operated for profit and fall within the size standards set by the Small Business Administration (SBA).They must also do business in the United States or its possessions and have a tangible net worth of less than $15 million and an average net income less than $5 million after taxes for the preceding two years. This list of eligible and ineligible businesses  details companies that qualify for a CDC loan. (In general, CDC loans will not approved to invest or speculate in rental real estate.)

To qualify, businesses must be able to demonstrate the ability to repay the loan from the projected operating cash flow of the business and may not have other funding options outside the SBA.

Maximum loan amounts are determined based on the intended use of the funds.

Economic Injury Disaster Loans

Economic Injury Disaster Loans loans are the primary government assistance available to repair and rebuild non-farm, private sector businesses that are damaged or destroyed by a disaster (hurricane, tornado, etc.). The program is the only form of SBA assistance that’s not limited to small businesses. It can provide up to $2 million of financial assistance to businesses or private, non-profit organizations that suffer substantial financial loss from a declared disaster.

The details. Although this loan will not replace lost sales or revenue, it will help businesses meet financial obligations that could have been met had the disaster not occurred. It also provides relief from economic injury caused directly by the disaster so business owners can maintain a reasonable amount of working capital during the period affected by the disaster.

The businesses or private non-profit organizations must have sustained economic injury and be located in a disaster-declared county or contiguous county to be eligible.

The loan can be up to $2 million per business and does not have upfront fees or early payment penalties. The length of the loan is determined by a business’s ability to repay the loan.

Equity Investment – Small Business Investment Company (SBIC) Program

Created in 1958, the Equity Investment – Small Business Investment Company (SBIC) Program was designed to close the gap between available venture capital and the needs of small businesses in start-up and growth situations. SBICs are privately owned and operated small-business investment companies that combine their own money and funds borrowed from the SBA to finance small businesses though equity securities and long-­term loans.

The details. The first step to securing SBIC financing is using the SBIC directory to track down existing SBICs interested in financing your company. Because the program provides equity investment rather than debt financing, an investment company will buy a piece of your business and become a co-owner of the business. The percentage of the business that will be purchased and other details are negotiated by the investor and the company.

Microloan Program

The microloan program option is designed for small businesses needing very small loans to start or grow.

The details. The SBA makes funds available to nonprofit local lenders that then make loans of up to $50,000 to eligible borrowers. Every intermediary lender has its own lending and credit requirements; some collateral and a personal guarantee of the business owner are usually required. Loan terms vary based on the size of the loan, but the maximum length is six years. Interest rates also vary.

Indian Loan Guaranty, Insurance and Interest Subsidy Program

As its name implies, the Indian Loan Guaranty, Insurance and Interest Subsidy Program loan is specifically for individuals belonging to a federally recognized American Indian tribe or Alaska Native group or for corporations that are at least 51% owned by federally recognized American Indians or Alaska Natives. Its purpose is to assist in obtaining financing from private sources in order to promote business-development initiatives that enhance and bolster the reservation’s economy.

Terms of these loans are not made public.

The Bottom Line

Check out these alternatives to traditional commercial loans to see if your business qualifies and if any would provide financing on more favorable terms.

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