How to Use the Government to Your Advantage With Small Business Loans

I’ve written several small business loan articles 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, repeal of the Glass-Steagall Act in 1999, the 2002 passage of the Sarbanes-Oxley Act after Enron fell, and ever-increasing regulation since the Great Recession of 2007 to 2009 have all contributed to scaring banks into harsher credit practices.

But don’t worry. You won’t need to study up on any of those catalysts. We’re going to talk about how to get around high-intensity underwriting and find small business loans with the help of government guarantees.

3 types of government small business loans

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

1. PPP

The Paycheck Protection Program (PPP) was established to ease the impact on small businesses from the COVID-19 pandemic and subsequent lockdown with what are sometimes called “COVID loans.” The program provides funds to be used to keep payroll up even if businesses have slowed or closed.

The first round of PPP loans are now able to be fully forgiven, and for businesses that sustained a heavy impact, a second round of funds is available.

2. SBA

The Small Business Administration (SBA) is the original government guaranteed lending agency. It was formed in 1953 and guarantees loans originated by private lenders if they pass an eligibility test.

The SBA runs the PPP, and most big banks and even community banks have departments dedicated to originating SBA loans in order to sell the guaranteed portion on a secondary market.

There are four main types of SBA loans, and, luckily, The Ascent has posted articles about all four:

• 7(a): This is the most common type and can be used for a startup or operating expenses.
• 504: Mostly used for real estate loans.
• SBA Express: Have a quick turnaround and help you get cash fast.
• Microloans: Provide startup capital to brand-new businesses.

3. USDA

The U.S. Department of Agriculture (USDA) may not be what you expected to come next. The USDA focuses on rural regions, where not many banks spend the time or capital to focus, and the lack of revenue backing makes it hard 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 done for far higher amounts. There is one caveat: The USDA has a finite amount of money available each year, and every loan is scored based on a variety of characteristics. Therefore, once the money is close to running out, you’ll only get the loan if you score well.

Requirements to secure a government small business loan

Each of the loan programs has its own set of eligibility rules, but they’re fairly 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 may 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 has to be small

Likewise, the government doesn’t want to lend money (at least through the SBA) to big businesses. The SBA has a multi-part size standard test it requires banks to put your business through in order to qualify. If your business has shareholder’s equity of less than $15 million and fewer than 300 employees, you’ll almost certainly pass.

The USDA is more lenient on how big your business is because it just wants to get the economy going in rural areas. But remember it has a set amount of dollars each year to lend, so if you run a $50-million company, you may not be able to get enough money to make the process worth it.

3. You have to be able to make the loan payments

Government-guaranteed loans exist to fill the hole in the market where banks won’t lend. That doesn’t mean the government wants to guarantee loans with no chance of success. Loans must have cash flow equal to 1.15 times the annual loan payments or produce reasonable projections showing how the loan will get the business to 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 with your banker

The SBA was smart to make it standard practice to farm out loan origination to private lenders, such as banks and credit unions. The 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 business bankers to understand conventional and government-guaranteed lending. If your bank doesn’t even do 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 financials
• Debt schedule
• Personal financial statement
• Entity/organization documents
• SBA forms (to prove you aren’t a felon)
• Management resume
• Purchase contract

There will certainly be more than that required as the process moves forward. The banker needs to meet with the credit department to approve submitting the loan, and literally hundreds of questions could come up.

3. Get through underwriting

The job of a loan underwriter is to kill the deal. They’re trained to overanalyze every aspect of the business and financials to spot any possible risk. Some of them go as far as pulling LexisNexis reports and searching for 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 that doesn’t make the underwriting process any simpler.

As you may have guessed, government loans come with a plethora of forms to fill out and reports to pull to ensure they fully comply with all relevant rules. This can be a massive headache and make the whole thing take three or four times as long as the conventional loan process.

The key is to prepare yourself ahead of time to go with the flow. Mentally add a few months to whatever date your banker says you’ll close on the loan, and you’ll likely end up happier.

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

Ronald Reagan said those were the nine most terrifying words in the English language. At times, that’s certainly true, but it doesn’t need to be that way when you’re applying for government-guaranteed loans. Nail down your loan application, get organized so you can respond to any document request, and wait.