Grants and Loans

Small Business Guide to Government Grants and Loans

We've all seen the headlines: "Millions in free government money for your business." Late-night infomercials, reference guides and websites promote the availability of grant money to entrepreneurs for starting and expanding businesses. Sound too good to be true? It is.

The truth is that federal and state governments do not provide grants for starting and expanding small businesses. However, the U.S. government does offer a wide-variety of low-interest loans and venture capital financing programs to help entrepreneurs start and grow their businesses. In addition, some federal and state agencies award a limited number of grants for very specialized business activities such as scientific research and development.

The following guide provides an explanation of federal and state loan, grant and venture capital financing programs available for your small business.

Small Business Loans

SBA Loans

The U.S. Small Business Administration (SBA) assists small business owners to start and expand their businesses by helping them get loans through private banks and financial institutions. SBA is the largest single financial backer for the nation's small businesses with a portfolio of business loans, loan guarantees and disaster loans worth more than $45 billion, in addition to a venture capital portfolio of $13 billion.

SBA offers a number of low-interest loan programs for new and expanding small businesses. SBA is not a lender, and does not grant loans directly to businesses. Rather, SBA is a guarantor of loans made by privately owned banks and other financial institutions that agree to follow SBA's guidelines.

To apply for an SBA loan, you need to visit your local participating bank or lending institution. When you apply for an SBA loan you are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty. This guaranty is portion of the loan the SBA will pay back to the lender should you default on your loan payments.

SBA's Financial Assistance Guide describes SBA loan programs, including eligibility requirements, and how to apply for them.

Remember, that you'll need to go through a local bank or financial institution to apply for an SBA loan. To get a list of SBA lenders in your area, contact your SBA District Office.

SBA Loans for Veterans

SBA offers a few loan programs to assist veterans and members of the military community:

  • Patriot Express Loan Initiatve
    The SBA's Patriot Express program provides loans for veterans and members of the military community wanting to establish or expand small businesses.
  • Military Reservist Economic Injury Disaster Loan Program
    Provides funds to eligible small businesses to meet its ordinary and necessary operating expenses that it could have met, but is unable to meet, because an essential employee was "called-up" to active duty in their role as a military reservist.

USDA Rural Development Loans

If your business is located in a rural community, you might consider the the U.S. Department of Agriculture (USDA) has a Business and Industry (B&I) Guaranteed Loan Program. B&I loans work in the same manner as SBA loans. The USDA provides guarantees of up to 80 percent of a loan made by a commercial lender. Loan proceeds may be used for working capital, machinery and equipment, buildings and real estate, and certain types of debt refinancing.

The B&I Loan Guarantee Program Fact Sheet provides all you need to know about obtaining one of these loans, including eligibility, loan terms and conditions, equity requirements, and interest rates. Like SBA loans, you need to go through your local bank or financial institution to apply for a B&I loan. If you have any questions about the B&I Loan Guarantee Program or other financial options available for small farms, contact your state's Rural Development Field Office.

Other Federal Loan Programs

Depending on your type of business, you may qualify for specialized federal loan programs. For example, if you are small and disadvantaged business engaged in federal transportation contracts, you may qualify the U.S. Department of Transportation's Short Term Lending Program.

If you are a small trucking company, the Environmental Protection Agency's (EPA) SmartWay Transport Partnership has partnered with several lenders to make money available to small trucking companies to help pay for technologies that saves fuel while reducing pollution.

To find other federal loan programs serving small business concerns, visit GovLoans.gov, the U.S. government's central database of government loan programs.

State and Local Loan Programs

Many state and local governments also offer low-interest loan programs that they guarantee through commercial lenders. Contact your local Small Business Development Center to get assistance with locating state and local funding sources for your small business.

Venture Capital Financing

Small Business Investment Companies (SBIC)

In 1958, Congress created the Small Business Investment Companies (SBIC) program to help small U.S. companies raise capital. SBIC's are privately owned and managed investment firms that provide venture capital and start-up financing to small businesses. To be eligible for SBIC financing, your business must meet certain SBA size requirements for a small business. Generally, the SBIC Program defines a company as "small" when its net worth is $18.0 million or less and its average after tax net income for the prior two years does not exceed $6.0 million. When you contact an SBIC, you'll need to present a professional business plan that addresses your company's operations, management, financial condition and funding requirements.

The following resources will help you locate SBIC financing:

Active Capital (formerly Angel Capital Electronic Network - ACE-Net)

Active Capital is a nationwide listing service that connects entrepreneurs with angel investors. Potential investors can obtain information on start-ups and expanding small businesses seeking $250,000 to $5,000,000 in venture capital. Active Capital's main benefit is that it allows entrepreneurs to directly access a nationwide network of investors while complying with federal and state securities regulations.

Small Businesses in Economically Distressed Communities

If your business is located in a low-income geographic area, there are a couple of venture financing options available to you. First, there is a special type of SBIC called Specialized Small Business Investment Companies (SSBIC). SSBIC's provide assistance solely to small businesses owned by socially or economically disadvantaged persons. Secondly, you may be eligible for New Markets Venture Capital (NMVC) financing. Modeled after the SBIC program, the NMVC program makes equity investments in small businesses located in economically distressed communities in urban and rural areas. NMVC financing is available in limited areas, and available from these venture capital firms.

Federal and state grants are only available to support non-profit organizations, lending institutions, and state and local government programs that provide technical and financial assistance to small businesses. If your business is one of these organizations, Grants.gov provides grant opportunities available from federal agencies.

Again, federal and state government agencies do not award grants for starting, managing and expanding small businesses. However, state and local government grant opportunities may exist for small businesses engaged in very specialized activities. Many states provide job training grants to new and expanding firms. Other states provide grants to fund scientific research projects, and grants for agricultural development. For example, the New York State Dept. of Agriculture & Markets' Winery Website Improvement Grant Program provides money to state wineries and vineyards for improving their websites. The California Energy Commission's Energy Innovations Small Grant Program provides funds to small businesses to conduct research that establishes new, innovative energy concepts. Check with your state or local government to find these sorts of specialized grant opportunities.

Small Business Grants

A few federal programs provide grants to small firms engaged in scientific research and development (R&D). The Federal government's SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) programs award a specific percentage of Federal R&D funds to qualified small businesses. SBIR/STTR programs encourage small firms to undertake scientific research that helps meet Federal R&D objectives, and have high potential for commercialization if successful. The following agency award SBIR/STTR grants:

More Information

While there is no free lunch when it comes to getting government financing for your small business, there are a wide-variety of low-interest, accessible loans and venture capital available to you. This guide has presented only a sample of the most common government programs. To get more information on government grant and loan programs.