Business Funding – Government Loans
Government Financing Programs
For many small businesses, government assistance can make the difference in getting the money they vitally need to start, continue, or expand operations. The US Small Business Administration (SBA) is a federal agency that offers a number of financing and operations assistance programs to small businesses. The programs include loan guarantees, training and educational programs, advisory services, publications, financial programs, and contract assistance. In fiscal year 2011, nearly $30 billion in long-term credit and other financial assistance was provided to more than 60,000 small businesses through SBA’s network of participating banks, non-bank lenders, certified development companies, and SBA-licensed companies. State and local governments also offer an array of financing assistance.
SBA Financing for Small Businesses: Currently, there are three basic financing programs that remain available through the SBA:
- Microloan program for small businesses loans under $50,000,
- Section 7(a) loan guarantee program, and the
- Section 504 Community Development Corporation tax credit program.
All SBA guaranteed loans are done via your local bank. The SBA does not loan directly anymore. The Microloan program is perhaps the most accessible to startup businesses. Microloan funds are SBA grants to approved, nonprofit organizations that accept loan applications and make loan decisions. The Section 7(a) loan guarantee program includes a variety of separate specialized programs, but the most popular has been “LowDoc.” This program was implemented in 1993 to increase the availability of small loans (under $150,000) to businesses by reducing the paperwork previously required for an SBA loan guarantee. The SBA LowDoc application is a one-page form that, on one side, has the applicant’s SBA loan application and, on the other side, has the lender’s request for an SBA guarantee. The Section 504 program involves SBA participation in private, nonprofit companies (Certified Development Companies or “CDCs”) established for the purpose of providing long-term, fixed-asset financing to small businesses.
SBA Loan Guarantees: The SBA offers private lenders a guarantee on loans made to qualified small businesses. If the borrower fails to pay the loan, the lender can usually obtain up to 85 percent of the outstanding loan principal from the SBA. The government guarantee encourages lenders to grant credit that otherwise would not be available on reasonable terms and conditions. Commercial lenders often prefer a SBA-guaranteed small businesses loan because the federal guarantee not only reduces the lender’s risks, but the bank has a readily available secondary market in which to sell the guaranteed portion of the loan. In addition, the guaranteed portion of the loan does not count against the federally mandated reserve funds that banks must maintain as protection against loan losses.
Section 504 Loan Program (CDCs): Section 504 loans are extended through SBA-approved companies called Certified Development Companies (“CDCs”). A CDC is a private nonprofit corporation set up to contribute to the economic development of its community or region. Typical CDC-financed projects range in size from $500,000 to $2 million, with an average cost of $1 million. The total size of projects using CDC financing is unlimited, but, as with SBA loan guarantees, the maximum amount of CDC participation in any individual project is $1,000,000 (or $1.3 million for some public projects). Participants in a CDC are usually banks, utilities, professional organizations, community groups, and private investors. For banks in particular, lending through a CDC is an opportunity for them to meet their bank regulatory requirements for community lending while spreading the risk from those investments among the separate CDC corporate members. The bank also need not consider their CDC participation against their loan loss reserves. CDCs can also minimize risks by selling 100 percent SBA-guaranteed debentures to private investors in amounts up to 40 percent of a project or $750,000, whichever is less. Finally, CDC investing by banks creates an attractive loan-to-value ratio; the bank usually contributes only about 50 percent of the CDC loan proceeds, yet is given a priority claim against the value of the project or collateral.
SBA Financing for Exporting: For those small businesses considering exporting outside the U.S., the SBA and several other government agencies offer special financing programs. Note, however, that while exporting may offer tremendous market potential for certain small companies, there will be additional research and preparation expenses necessary for developing and implementing an international business plan. Among the additional considerations that may affect your costs include: multinational legal compliance (labeling, packaging, product safety and liability laws, etc.), additional promotional material for different countries and languages, transportation costs for product/service delivery and personnel travel, and obtaining any required export licenses. Help in preparing your plan, and in finding more information about exporting, can be obtained through federal SBA and Department of Commerce assistance programs, state commerce departments, local chambers of commerce, international trade associations, export management and trade companies, and private consulting firms. The SBA’s financing programs include: The Export Working Capital Programs The International Loan Program
State and Local Public Funding: In an effort to improve their local economies, most states, and many municipalities and counties, sponsor a variety of public funding sources for small business concerns. At the state level, nearly all states have some form of state economic development agency and/or state finance authority that make loans or loan guarantees to small businesses. State Commerce Departments often have direct or participating loan programs that may be even more attractive than SBA-guaranteed loan programs.
States also receive federal money through federal Housing and Urban Development (HUD) block grants that can be used for a variety of local improvements, including small business financing programs. Urban development spending for larger cities, or smaller city community assistance programs, are oft-used purposes for the federal money. While the criteria for a small business to obtain a loan of grant money varies between states, the state will typically expect owner equity participation and evidence that a clear economic or social benefit to the local community will result from the funding. The amount of money made available at the local level will usually depend upon the perceived need for job creation in the area and the relative income level of that community. In addition to state money, local county or municipal governments often loan small amounts of capital to local businesses. These local, “microloan” programs may be characterized by minimal (and sporadic) funding, so the timing of your request can be critical. Try to contact any local agencies as soon as possible, even if you don’t need the money immediately, to determine the available funds at that time and when the program is expected to receive any additional money. Local programs can loan small amounts of money, e.g., under $10,000, for working capital, equipment or inventory purchasing, or property improvements. Finally, don’t forget to check local colleges, universities, or trade schools to see if they have any small business assistance programs. Some institutions, with the help of public funding, provide business “incubator” programs that can include consulting, marketing, services, facilities, and financing opportunities to local businesses as part of the institution’s business education program.