Government Loans

Federal, provincial or state government loans are usually given for small businesses, for funding education, and for disaster relief.

The U.S. Government works with intermediaries, banks, and other lending institutions to provide loans and venture capital financing to small businesses that are not able to obtain financing from conventional lending sources. These loans are part of the Small Business Administration (SBA) primary business loan program. SBA loans are also called 7 (al) loans.

7(a) loans may be applied to most small business purposes. For example:

• small business start-up
• small business expansion
• purchase of equipment
• working capital
• inventory
• acquisition of real estate

The SBA can ensure up to $750,000 of a private-sector loan. The applicant and the lender negotiate Interest rates for 7(a) loans.

Higher education is a worthwhile but expensive process, draining not only your energy level but your wallet as well. Fortunately, federal Financial Student Aid is available to help students through this costly time. Federal education loans require an online application. If you are a citizen of the U.S., applications are available in English and Spanish. If you are a citizen of Canada, applications are available in English and French. The U.S. application is called a FAFSA (Free Application for Financial Student Aid). The FAFSA will ask you for your personal contact information, income level, marital status, parents’ income, proposed program of study and more. You will also have to confirm that you are eligible to receive a government loan. Generally, you are eligible if you are a citizen of the country, state or province issuing the loan, or if you are an “eligible” non-citizen. An eligible non-citizen is usually a landed immigrant or refugee. Note that federal government loans are usually not available to students without one of these three designations. However, these students may be eligible for state government loans.

In addition to citizenship/eligible noncitizen requirements, the Financial Student Aid programs funded by the U.S. Department of Education require that applicants:

• Possess a valid Social Security Number
• Have a high school diploma or a General Education Development (GED) certificate, or achieve a passing score on an approved "ability to benefit" examination
• Enroll in an eligible program as a regular student pursuing a degree or certificate;
• Register (or have registered) for Selective Service, an agency that provides additional manpower to the U.S. Armed Forces in the event of an emergency, with a result of Eligible or Partially Eligible on Question 31 re: Drug Conviction (Note: this condition applies only to male FSA applicants between the ages of 18-25)

The FAFSA will determine your eligibility for several types of student aid, including:

• Loans
• Grants
• Work-Study Positions
• Non-federal student aid (from state government, or from the school)

The United States government also gives loans to citizens whose homes or businesses have been involved in a natural disaster. These loans are meant to help disaster victims recover from damage done to their property.

Disaster Assistance Loans are made available by the U.S. Small Business Administration, but are not exclusively for small business owners. These loans are available to:

• Small business owners
• Homeowners
• Renters
• Personal Property Owners

In order to be considered for this type of loan, the person requesting the loan must be in a declared disaster area. Examples of disasters include floods and hurricanes.

One loan available to an individual in a declared disaster area is the Personal Property Loan. This loan can provide up to $40, 000 to a homeowner or renter. The purpose of this loan is to help repair or replace personal property lost or damaged during the disaster. Examples of personal property include clothing, automobiles, and furniture. Note that Personal Property does NOT include Real Estate. Note also that this loan is meant to replace basic property needed for survival. One cannot take out a Personal Property loan to replace expensive jewelry, antiques, collectors items, recreational vehicles or other “irreplaceable” items. Another loan available to disaster victims is the Real Property Loan. Homeowners can apply for a loan of up to $200,000 to repair or restore their primary home to the condition in which it was in before the disaster. The loan cannot be used to renovate the home, add extra rooms, put in skylights, or other nonessential changes. However, the loan can be used if city or county building codes structural improvements to be made to the home. Loans can be increased by as much as 20 percent to ensure protection for the damaged real property from possible future disasters of the same type.

Note that the Real Property Loan applies only to homeowners. Renters can apply only for the Personal Property Loan.

If you have insurance coverage on your personal property or home, subtract the amount you will receive from the insurance company from the total damage to your property in order to determine the amount for which you can apply to the SBA. If you have an outstanding mortgage to your home, and must apply insurance proceeds against it, the amount applied can be included in your disaster loan. However, if you apply insurance proceeds against an outstanding mortgage of your own accord, the amount applied cannot be included in your disaster loan. If you are having trouble reaching an agreement with your insurance company, or have not made a settlement, you may apply for a loan in the full amount of your damages and assign any insurance proceeds to be received to the SBA. This means that you do not have to wait to hear back from your insurance company before applying for an SBA loan. In such cases, the SBA will give you MORE money, and you must reimburse them upon receiving compensation from your insurance company. To determine the rate of interest that will be charged on your loan, the law demands a test of your ability to obtain funds elsewhere. This “credit-elsewhere” test also applies to applicants for both personal property and real property loans. If you CAN obtain credit elsewhere, the interest rate will be changed based on the cost of money to the U.S. government, but will not exceed 8 percent per year. If you fail the “Credit-Elsewhere” tests, and CANNOT obtain credit elsewhere, the interest rate charged will be half of that charged to applicants found able to obtain credit elsewhere, but will not exceed 4 percent per year. The maximum maturity, or repayment term of an SBA loan, is set at 30 years. However, the SBA will determine the terms of repayment on a case-by-case basis depending on your ability to pay back your loan. The amount of money that the SBA will lend you depends on the actual cost of repairing or replacing your home and/or personal property, less any insurance settlements, other reimbursements or grants. You do not need to apply to a bank first; as long as you meet the requirements discussed above, you are eligible to apply directly to the SBA.

In some cases, you may already have a mortgage on your home, and you may find yourself unable to have a disaster loan AND a current mortgage payment hanging over your head. In these cases, the SBA can refinance all or part of previous mortgages provided that:

• The applicant does not have credit available elsewhere
• The damage suffered is 40% or more of the value of the property
• The applicant intends to repair the damage

Be sure to discuss your situation with your loan officer.

Loans over $10,000 must be secured with collateral. The SBA will not reject your request if sufficient collateral is unavailable up front; however, the SBA WILL ask for whatever collateral is available. Typically, the collateral consists of a first or second mortgage on the damaged real estate. Once all this has been sorted, you will receive your money in installments, depending on when you need it to repair or replace damaged property. Remember, these types of Government Loans are given for very specific purposes. SBA requirements state that you obtain receipts and keep records of all loan expenditures as you restore damaged property. Keep these records and receipts for a minimum of three years, for verification purposes. If you are found misusing your loan money (for example, using your loan money for a luxury getaway to a Thailand spa), you will be penalized. The penalty for misusing a Government Loan for disaster relief is immediate repayment of one and a half times the original amount of the loan. If your home has been completely destroyed, and you cannot obtain a building permit to rebuild or replace your home at its original site, the loan amount may include the cost of relocating your home. If, however, you decide to relocate your home even though you are not required to do so, an SBA loan will cover only the exact amount of the damage.

If you are a farmer, and your farm in addition to your home was damaged, you can apply to the SBA for a loan to cover damage done to your home and/or personal property only. For farm damages, seek the assistance of the U.S. Department of Agriculture.

Real Property Loans are for primary homes only. They cannot cover secondary homes or vacation homes, though these types of homes might, under certain circumstances, be eligible for business disaster loans. If you are located in a special flood hazard area, you must possess flood insurance before the SBA can issue a loan. The amount of insurance required is the insurable value of the property in the special flood hazard area, but is not to exceed the maximum flood insurance available under the National Flood Insurance Act.

If your business, no matter what the size, has incurred physical damage resulting from a disaster, you may be eligible for financial assistance from the U.S. Small Business Administration.

Any business that is located in a declared disaster area and has been damaged during the disaster can apply for a loan to with the repairs or replacements of damaged property to its pre-disaster condition. The SBA makes physical disaster loans of up to $1.5 million to businesses that qualify.

The loan includes the repair or replacement of:

• Real property
• Machinery
• Equipment
• Fixtures
• Inventory
• Leasehold agreements

As well, disaster loans to repair or replace real property or leasehold improvements may be increased by up to 20 percent to protect the damaged real property against possible future disasters of the same kind.

SBA loans will cover uninsured physical damage. If you are obligated to apply insurance proceeds to an outstanding mortgage on the damaged property, you may include the amount applied in your disaster loan. The interest rate charged by the SBA on a disaster loan depends on your ability to obtain credit from other, non-federal sources.

If the SBA determines that the business is unable to obtain credit elsewhere (considering the cash flow and assets of the business, its principals and affiliates), the interest rate will not exceed 4 percent per year.

Note that the disaster loan is meant to assist you in returning your property to the condition it was in before the disaster. It cannot be used for other purposes, such as expanding or upgrading a business. The only circumstance in which an SBA loan can be used is if city or county building codes require such upgrading. The penalty for misusing disaster funds is immediate repayment of one-and-a-half times the original amount of the loan. The SBA demands that you get receipts and retain good records of all loan expenditures as you repair your damaged property, and that you keep these receipts and records for three years.

In some cases, you may already have a mortgage on your business, and you may find yourself unable to have a disaster loan AND a current mortgage payment hanging over your head. In these cases, the SBA can refinance all or part of previous mortgages provided that:

• The applicant does not have credit available elsewhere
• The damage suffered is 40% or more of the value of the property
• The applicant intends to repair the damage

Collateral is not required for loans of $10,000 or less. Loans exceeding this amount require you to pledge collateral to the extent that it is available. Typically, the collateral would consist of a first or second mortgage on the damaged business property. The SBA also requires personal guaranties by the principals of a business.

SBA loans will also cover economic damage suffered by your business as a result of the disaster, but only if you and your business do not have credit available elsewhere. As well, your business must fit the SBA’s definition of “small business.” The maximum amount the business and any affiliates can have access to for any one disaster is limited to $1.5 million for both physical damage and economic injury combined.

If you are located in a special flood hazard area, you must possess flood insurance before the SBA can issue a loan. The amount of insurance required is the insurable value of the property in the special flood hazard area, but is not to exceed the maximum flood insurance available under the National Flood Insurance Act.

If your small business is located in a declared disaster area, and has undergone substantial economic setbacks, regardless of physical damage, you might be eligible for financial assistance from the U.S. Small Business Administration.

Small businesses and small agricultural cooperatives that have undergone substantial economic injury as a result of a physical disaster or an agricultural production disaster designated by the Secretary of Agriculture can apply for the SBA's Economic Injury Disaster Loan (EIDL) Program. By substantial economic injury, the SBA means that the business is unable to meet its obligations and to pay its regular and mandatory operating expenses.

An EIDL can assist you in satisfying required financial obligations that your business could have met had it not been for the disaster. The SBA provides EIDL assistance only to those businesses proven incapable of obtaining credit from other sources. A business can receive up to $1.5 million in disaster assistance from the SBA. This amount contains both economic injury and physical damage assistance. Your loan amount will be determined according to your actual economic injury and financial needs. The EIDL will provide you with operating funds until your business recovers.

You may ask for an EIDL for the amount of economic injury and operating needs, but not exceeding the amount your business could have paid had the disaster not occurred.