You need to have enough capital before you can start a business and it’s never wise to touch your life savings or even the money you have set aside for the rainy days. This is so that no matter what happens to your business, your personal life would not be in jeopardy.
Business loans from the government are among the available options for people looking for capital. Many startup businesses consider these kinds of loans more suitable for them because traditional lenders such as banks are often reluctant to grant loans to those without any financial history or a stellar credit report. Although one of the requirements of business loans the government is offering is a good credit report, they are not as stringent as the private sector and they also offer better interest rates and terms.
Who Grants Government Business Loans?
There is a government body known as the Small Business Administration (SBA) and they are the ones who partner with banks and credit unions, backing up loans to lower the lender’s risk and thereby boosting the business owner or entrepreneur’s credibility. If the borrower defaults on the loan, then the SBA will pay off the balance. No risk to the bank.
You can apply for a business loan for the following purposes:
- Establishing a line of credit
- Refinancing current debts
- Purchasing new machinery, equipment, supplies, and others
- Financing leasehold improvements
- Financing commercial mortgage
Types of SBA Government Loans
The Small Business Administration has several lending programs and some of its most popular types of loans include:
- 504 Fixed Asset Program
This type of government business loan features long term financing and fixed rates. It is more suited for businesses that will directly benefit the community by offering much needed services or by providing more jobs. The maximum loan amount is $5 million.
- 7(a) Loan Guarantee Program
This loan is geared towards helping small businesses get started or grow. The maximum amount you can loan under this program is $5 million.
- Disaster Assistance Loan Program
This program aims to provide renters or homeowners with a long term, low interest loan to help them restore their property after being struck by a disaster.
- MicroLoan Program
This is generally a short term loan and is often used to purchase supplies, equipment, furniture and so on. The maximum loan amount is $50,000.
Preparing Your Loan Application
Each program under the SBA has its own application process and set of eligibility criteria. Generally speaking however, you need to have a decent credit report and should have invested a reasonable amount of money into your business. You should also have a sound business plan, and you’ll need to submit your income tax returns for the last 3 years. Some legal documents such as your articles of incorporation, license and contracts will also be required.
Business loans from the government are without a doubt very helpful because they give you excellent terms and low interest rates. But they are not for everyone. If you don’t meet any of the requirements above, or if you need a loan fast, then you have to consider other non-traditional options such as invoice factoring. Invoice factoring is not technically a loan, but a cash advance against your invoices. The interest rates are higher than regular business loans but they are easier to attain and also have quicker approval times.