Grants & Loans: Break Through the Myths & Find the Right Financing for Your Needs

Note: The ARRA (Recovery Act) initiatives and/or programs referenced in this article will expire on September 30, 2010. Any statements about qualifying time periods, or extensions of these dates, as they pertain to the availability of ARRA programs are over-ridden by the expiration of the Act on September 30, 2010.

Whether your small business is established or you are new to business ownership, it's important to understand the variety of low-interest government-backed business financing available to you in the forms of loans and grants.

Even if your business venture doesn't require significant capital investment, there are hundreds of government financing programs that can benefit your business - from energy efficiency loans to new American Recovery and Reinvestment Act (ARRA) related loans, such as the SBA's new ARC Loan Program, that helps struggling small business owners pay off certain business debts.

This post explains away some of the myths about government finance programs for small businesses and also helps build a picture of the available loans and grants for which you might be eligible.

Understanding the Difference between Government Grants and Loans

Much confusion exists about the difference between government grants and government-backed loans and how this impacts small business owners. Here are the basics:

1. Government Grants - Many small business owners make the mistake of assuming they are eligible for 'free money' in the form of government grants. Truth is, government grants for for-profit small business owners don't exist. Refer to this excellent post on the Business.gov Community - 'The Truth About Grants' - for the official word on government grants, from the government. Essentially 'Federal and state government agencies do not provide grants for starting a business, paying off debt, or to cover operating expenses. Government agencies do not provide 'special' grants for women, minorities, veterans or disabled entrepreneurs.'

The government does provide grants to '...non-profits, educational institutions, (and) associations ... but rarely are these available to small businesses, and they are never available to cover start up costs, debt and operating expenses.'

2. Government-Backed Small Business Loans - While the government does not lend business owners money, it does provide a guaranty to banks and lenders for money lent to small businesses (through the SBA). This mitigates the risk for banks and lenders and makes them more inclined to provide SBA-backed loans to small business owners who don't qualify for traditional loans.

Small Business Loans - Finding the Right Financing for Your Needs

Now that the fundamentals of grants versus loans should be a little clearer, you'll need to understand which of the hundreds of government loans available for small businesses is right for you! Your starting point should be an essential tool from the government - the Small Business Loans and Grants Search Tool. Based on your business profile and needs, the tool will guide you toward the financing for which your small business might be eligible.

To give you a snapshot of the types of government loan programs available - from starting your business, to getting assistance as a disadvantaged or distressed business owner - below is a summary of the categories and business needs that government loan programs serve.

• SBA Loans - The SBA has developed a range of loan programs in cooperation with banks and lenders to provide small business owners with financing for starting and expanding their business, including basic 7(a) loans, 504 loans and microloans. In addition, SBA also offers disaster assistance loans, export assistance loans, veteran loans (Patriot Express), and the ARRA-related ARC Loan Program. More about SBA Loans here.

• Disaster Assistance Loans - If your business sustains economic losses or physical damage as a result of a Presidential-declared disaster, you may be entitled to government disaster assistance loans.

• Loans for Energy Efficiency Initiatives - A hot topic right now, there are many government-backed financial incentives available to small businesses for energy efficient facility upgrades. In addition, certain agencies are offering grants to small firms engaged in scientific research and development of 'green technology'.

• Farm and Agricultural Loans - The U.S. Farm Service Agency (FSA) administers and manages farm commodity, credit, conservation, disaster and loan programs. State agricultural agencies and local non-profits also provide farm loans. More on farm and agricultural loans.

• Export Assistance Loans - If you need help financing your export transactions, the SBA's Export Express Loan Program can help, as can the Export-Import Bank and other organizations. More on how to obtain export financing.

• Rural Business Loans - For businesses in rural communities (priority is given to communities with a population under 25,000), the U.S. Department of Agriculture (USDA) has a Business and Industry (B&I) Guaranteed Loan Program that provides guarantees of up to 80 percent of a loan made by a commercial lender.

• Loans for Veterans - In addition to the SBA's Patriot Express loan program, there are several government loan and loan application programs for veteran small business owners. More on loans for veteran-owned small businesses.

Each loan program has unique application and eligibility requirements, however, most lenders ask for the same information from you. Before you apply for a loan, you should get some basic documentation together that will go into just about any loan package. Here is a useful SBA Loan Checklist and a general business loan checklist.

Additional Resources

• Business.gov's Small Business Loans and Grants Guide - The government's one-stop shop Web gateway, where you can find more information on loans and grants.
• Loans and Grant Advisor - The Loans and Grants Advisor Blog on the Business.gov Community is the official word on government loans and grants for small businesses.
• *Securing a Small Business Loan Quickly
• *The Recovery Act: SBA Loans and Your Small Business
• *Women Business Owners - Finding the Right Loans, Grants and Financing
• *National Small Business Week: New Interest-Free SBA Loan for Small Businesses in Financial Hardship
• *Financing the 'Greening' of Your Small Business
• *How to Prepare a Loan Proposal

*Note: Hyperlink directs reader to non-government Web site.

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley