We’re from the government, and we’re here to help.
If, as an entrepreneur, these words strike fear into your heart, we get it. Nonetheless, the government backs, funds, runs, or otherwise supports a number of programs that can help you find growth capital, and sometimes even startup funds, for your business. They range from the relatively well-known Small Business Administration offerings to Community Development Financial Institutions and the somewhat more complex New Markets Tax Credits. Together, they can provide access to financing and opportunities that would otherwise be missed, even by the most aggressive entrepreneurs.
Here are three sources of government funding every entrepreneur should know about:
SBA Loan Programs: The SBA’s 7(a) loan program is the largest government-backed loan program for entrepreneurs. It’s designed to encourage lenders to work with companies they might otherwise consider too risky. The SBA doesn’t actually make loans itself. Instead, it guarantees a portion of the loans made to entrepreneurs by traditional financial institutions.
Depending on the size of the loan, the SBA generally guarantees from 75% to 85% of the total loan amount. The 7(a) loan program can help finance up to $5 million, which can be used to buy a business, for long-term working capital, or to purchase equipment.
The SBA’s 504 loan program is designed to help finance long-term assets such as buildings and real estate, and provides up to $5.5 million for manufacturers. The SBA also guarantees lines of credit.
The caveat is that SBA loans can come with hefty fees – in a sense, the business owner is buying insurance on the loan. Fees currently start at 3.5% of the guaranteed amount of the loan and can be financed as part of the loan.
In 2008, the SBA backed about 2.3% of all small business loans in the U.S.
New Markets Tax Credits (NMTC): The New Markets Tax Credits program encourages investment in low-income areas. Investments in qualifying projects can get a 39% tax credit taken over a seven-year period. Through the end of 2008, a total of $25 billion in tax credits had been granted.
NMTC money is chiefly used for real estate, with about 82% being used this way. But entrepreneurs can still benefit from the program, using New Markets Tax Credits to build or rehabilitate physical locations including office space, warehouses, manufacturing facilities, or retail locations.
Entrepreneurs who are interested in the program should first find out which institutions in their area have qualified as Community Development Entities (CDEs) and are therefore able to grant New Markets Tax Credits.
Community Development Financial Institutions (CDFI): CDFIs are financial institutions that support the economic revitalization of low-income communities, including the businesses located there. Banks, credit unions, and venture funds may all be certified as CDFIs and use federal funds to invest in businesses or real estate, to make consumer loans, or to provide other financial services in communities that lack them.
While the SBA relies on banks to make loans to entrepreneurs, CDFI’s are often able to provide capital even when traditional lenders are reluctant to get involved. Entrepreneurs who have worked with CDFIs describe the due diligence process as being more intensive than that used by most banks, but they often say they get a valuable mentoring relationship – in addition to cash – in return.
The availability of CDFI financing depends greatly on the city in which a business is located. In the inner cities, particularly, loans are highly concentrated by geography. Milwaukee and New Orleans appear to have the most CDFI activity, perhaps due to the sophistication and experience of the financial institutions located there. Those cities are followed by Richmond, Manhattan and the Bronx, Durham, Memphis, Austin, Modesto, Nashville and Spokane.