Guide to applying for government small business loans


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Government-backed loans can help you get financing when you need it, even if your business has fallen on hard times. Keep reading to learn more.

I’ve written several articles about small business lending over the past few months, and it seems like I often end up talking about bank underwriting standards.

The savings and loan crisis of the late 1980s and early 1990s, the repeal of the Glass-Steagall Act in 1999, the passage of the Sarbanes-Oxley Act in 2002 after the fall of Enron and ever-increasing regulation since the Great Recession of 2007 to 2009 have all helped to scare banks into tougher credit practices.

But do not worry. You won’t need to study any of these catalysts. We’re going to talk about how to bypass high-intensity underwriting and find small business loans with the help of government guarantees.

3 Types of Small Business Government Loans

Here are the three main types of government loans you can access today.

1. PPP

The Paycheck Protection Program (PPP) was created to mitigate the impact on small businesses of the COVID-19 pandemic and subsequent lockdown with what are sometimes referred to as “COVID loans”. The program provides funds to use to maintain payrolls even if businesses have slowed down or closed.

The first round of PPP loans can now be fully forgiven, and for businesses that have suffered a significant impact, a second round of funds is available.


The Small Business Administration (SBA) is the originating government-backed lending agency. It was established in 1953 and guarantees loans issued by private lenders if they pass an eligibility test.

The SBA manages the PPP, and most major banks and even community banks have departments dedicated to making SBA loans in order to sell the secured portion in a secondary market.

There are four main types of SBA loans, and thankfully The Ascent has articles on all four:

  • 7(a): This is the most common type and can be used for start up or operating expenses.
  • 504: Mainly used for home loans.
  • SBA-express: Have a quick turnaround and help you get cash fast.
  • Microcredits: Provide start-up capital for brand new businesses.


The United States Department of Agriculture (USDA) may not be what you expected. The USDA focuses on rural areas, where few banks devote the time or capital to focus, and the lack of income support makes it difficult to support financial projections for a new business.

However, as long as your business is in a rural area, USDA loans are generally more flexible than SBA loans and can be issued for much larger amounts. There is a caveat: the USDA has a limited amount of money available each year, and each loan is scored based on various characteristics. Therefore, once the money is about to run out, you will only get the loan if you get a good score.

Requirements for getting a government small business loan

Each of the loan programs has its own set of eligibility rules, but they are pretty standard.

1. You must run an active business

The government wants to lend money to active businesses that provide jobs and produce goods or services. You might be able to get a USDA loan in a super rural area for an apartment complex, but other non-owner-occupied loan uses aren’t going to fly.

2. Your business should be small

Similarly, the government does not want to lend money (at least through the SBA) to big business. The SBA has a standard multi-part size test that requires banks to pass your business to qualify. If your business has equity of less than $15 million and less than 300 employees, you will almost certainly be successful.

The USDA is more lenient about the size of your business because they just want to kickstart the economy in rural areas. But remember it has a set amount of dollars to lend each year, so if you’re running a $50 million business, you might not be able to get enough money to make the process worthwhile. .

3. You must be able to repay the loan

Government guaranteed loans exist to fill the void in the market where banks do not lend. This does not mean that the government wants to guarantee loans without any chance of success. Loans must have a cash flow equal to 1.15 times the annual loan installments or produce reasonable projections showing how the loan will allow the business to achieve positive debt service coverage by year two of the loan.

How to Apply for a Government Small Business Loan

Applying for a government loan is remarkably similar to applying for any other loan.

1. Meet your banker

The SBA has wisely made it a common practice to outsource lending to private lenders, such as banks and credit unions. Banks have the local market and credit expertise that a government bureaucracy is unlikely to have.

Some banks have government guaranteed departments that your banker will refer you to, while others train their investment bankers to understand conventional and government guaranteed loans. If your bank doesn’t even provide SBA loans, consider switching to another.

2. Apply for the loan

The SBA loan application process is intense. Be prepared to provide the following documents:

  • Three years of tax returns
  • Interim financial statements
  • Debt schedule
  • Personal financial report
  • Entity/organization records
  • SBA forms (to prove you are not a criminal)
  • management resume
  • Purchase contract

There will certainly be more than that needed as the process progresses. The banker must meet with the credit department to approve the loan submission, and literally hundreds of questions could arise.

3. Go through subscription

A loan underwriter’s job is to kill the deal. They are trained to over-analyze all aspects of the business and finances to detect any possible risk. Some of them go as far as pulling LexisNexis reports and looking up your name online.

Government guaranteed loans are meant to make it easier to get a loan when you have a young or struggling business, but it doesn’t simplify the underwriting process.

As you might have guessed, government loans come with a plethora of forms to fill out and reports to pull from to ensure they fully comply with all applicable rules. It can be a huge headache and make the whole thing take three or four times longer than the conventional loan process.

The key is to prepare ahead of time to go with the flow. Mentally add a few months to the date your banker tells you you’ll take out the loan, and you’ll probably end up happier.

I’m from the government, and I’m here to help

Ronald Reagan said these are the nine most terrifying words in the English language. Sometimes this is certainly true, but it doesn’t have to be so when applying for government guaranteed loans. Nail down your loan application, organize yourself to be able to respond to any document requests and wait.


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