The Ultimate Guide To Government Small Business Loans
Government small business loans have favorable rates and terms, but a lengthy application process. Here's everything you need to know about applying for a government-backed business loan.
Getting funding from a bank, credit union, or another traditional route isn’t always possible for small businesses. Often, lenders don’t want to take the risk of lending to a business.
Fortunately, government small business loans offer low-interest loans with long repayment terms to qualified small businesses — even startups or new businesses. Keep reading to find out if a government business loan is the right funding opportunity for your business.
Table of Contents
- What Are Government Business Loans?
- Who Can Get A Government Business Loan?
- Types Of Government Loans For Small Businesses
- How To Qualify For A Government Business Loan
- How To Apply For A Government Business Loan
- Are SBA Loans Taxable?
- State & Local Government Loans For Small Businesses
- Alternatives To Government Business Loans
- Government Small Business Loans FAQs
- The Bottom Line On Government Loans For Small Businesses
What Are Government Business Loans?
Government business loan programs provide funding opportunities to small businesses. Small businesses and startups are often unable to be approved for traditional bank loans since they’re viewed as riskier ventures by lenders. That’s why the Small Business Administration has stepped up to provide funding options that benefit both the lender and the borrower.
The Small Business Administration (SBA) was established in 1953 to provide resources for small businesses. In addition to offering training programs and other tools to help small business owners succeed, the SBA has also established several funding programs designed specifically to aid small businesses.
How Do SBA Loans Work?
The SBA itself does not provide loans to small business owners. Instead, partner lenders known as intermediaries are used to provide funding.
The SBA has established guidelines under each program, keeping interest rates low and offering longer terms to make loans more affordable for the small business owner.
The SBA guarantees a percentage of the loan — usually anywhere from 50-85% of the funding. This means the SBA agrees to repay the guaranteed portion of the loan if the borrower defaults. This mitigates much of the risk for the lenders, giving them more incentive to lend to small business owners.
Who Can Get A Government Business Loan?
Government business loans are available to for-profit small businesses in the United States. Businesses must meet qualification guidelines to be funded. For SBA loans, businesses must meet the size requirements of the SBA based on their number of employees, net worth, and annual revenue.
Established businesses can use SBA-backed loans to expand with new or updated facilities, purchase equipment, or obtain working capital. Startups can also qualify to receive funding for their next big project. The purchase of businesses and franchises can be funded through SBA loan programs as well.
The SBA offers funding opportunities for military veterans and service members through the Veterans Advantage program.
Businesses run by women, minorities, and veterans, or those in underserved communities — including low-income areas — can request funding through the SBA Community Advantage program.
Types Of Government Loans For Small Businesses
The SBA has multiple loan programs available. Before you apply, understand what loans are available and which are best for your business’s unique financial needs.
How To Qualify For A Government Business Loan
While requirements vary by lender, borrowing amount, and type of loan, here’s an overview of what you need to qualify for a government business loan.
Can I Get A Government Business Loan With Bad Credit?
A minimum score of 680 is typically required to qualify for most SBA loan programs.
In addition to credit scores, lenders will also evaluate personal credit reports. You may be disqualified if you have:
- Previous defaults on government-backed loans
While some negative items like collections or missed payments may not disqualify you from a loan, you will need to explain these to your lender.
If you don’t meet these credit requirements, take steps to improve your credit score before applying for government-backed loans. Start by getting a free credit report and score, paying off existing debt, and disputing erroneous credit report items.
How To Apply For A Government Business Loan
If you qualify for a government loan and are ready to move forward, the next step is to apply for an SBA loan. The process is time-consuming, but it is similar to applying for a traditional bank loan.
Here’s how to apply in four easy steps.
Are SBA Loans Taxable?
After receiving an SBA loan, you may be wondering how this funding affects your next tax return. Like other types of small business loans, SBA loan proceeds are not counted toward a business’s taxable income. That means your tax liability will not increase due to receiving an SBA loan. In fact, in most cases, you may even be able to write off interest paid on your loan as a deduction on your tax return.
The only time a loan will be taxed is if it is forgiven. If you were the recipient of a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL) Advance for COVID-19 relief, the good news is that in most cases, these forgiven funds are not taxable.
SBA Loan Tax Deductions
In most cases, you can deduct up to 100% of your loan interest payments to lower your income tax liability, provided you meet a few requirements.
To be eligible to deduct interest payments, you must:
- Be the person that is legally liable for the loan
- Have signed an agreement to repay the loan
- Have a true “debtor-creditor” relationship with the lender
There are some instances where you can’t deduct loan interest. Scenarios in which you would not be able to deduct interest from your tax return include:
- If you assumed debt or property from the original owner
- In the case of refinancing, interest is not deductible on funds from a second loan used to pay the first loan
- Capitalized interest can’t be deducted
Most borrowers should be able to deduct loan interest. However, if you’re in a unique scenario and are unsure, it’s always best to consult with a tax professional. Remember, deductions only apply to interest payments made. Any payment made toward the principal of your loan is not tax-deductible.
State & Local Government Loans For Small Businesses
If you aren’t interested in an SBA loan or you don’t qualify, there are other government loan options available.
State and local governments offer loan programs to eligible small businesses. While these may be difficult to find, you can start your search by visiting your state’s Department of Economic Development or Secretary of State website.
Alternatives To Government Business Loans
Government business loans aren’t for everyone. Whether your business doesn’t qualify, your credit score isn’t yet high enough, or you need funding immediately, there are alternatives worth considering.
Government Small Business Loans FAQs
The Bottom Line On Government Loans For Small Businesses
For those who qualify, government business loans offer some of the best rates and terms on the market, helping to grow a business without adding a heavy debt burden.
The government business loan application process can be long and difficult. But knowing what to expect and the steps needed to qualify will pay off for small business owners that are ready to take their businesses to the next level.