SBA loan, SBIR grant or revenue, matching US funding words to programs

What to take away

Funding words sort by who repays whom

Every funding term answers one question: who repays whom. A loan is repaid to a lender. A grant pays for work the agency wants done. An equity investor buys a share and expects a return.

Interest, collateral and personal guarantee belong to loans. Deliverables, milestones and reporting periods belong to grants. Valuation, dilution and exit belong to equity.

Founders often mix the words. They ask for a grant to cover payroll, or pitch equity to a bank. Each mismatch wastes an application cycle. Ask which party carries the loss if the plan fails. The answer names the funding family.

Federal programs differ by administrator. The SBA guarantees part of loans made by participating lenders. Agencies such as the National Science Foundation and the National Institutes of Health run the SBIR and STTR competitions.

State and regional bodies run their own programs beside the federal ones. Read the eligibility page before the application page, because eligibility language tells you which funding terms apply to you at all.

Matching a funding term to a named program

Use this table to match the word you are using to the program that actually offers it.

Read the table by column, not by row. The first column is the word you use, and the second is the program that offers it.

If your word does not appear, you may be using the wrong family. A founder offering equity for research money is really asking for a grant or a contract.

SBA 7(a) and 504: the two loan programs and what each finances

For the 7(a) program, the SBA guarantees part of a loan made by a participating bank or credit union, which lowers the lender's risk and can improve your terms. For the 504 program, a certified development company (CDC) makes an SBA-backed loan alongside a bank loan and your down payment.

The 7(a) loan is the flexible one. It can cover working capital, equipment, furniture, leasehold improvements and, in some cases, real estate. The maximum SBA 7(a) loan is $5 million.

The lender pays an upfront SBA guaranty fee, which it may pass to the borrower. The fee is a percentage of the guaranteed portion and varies by loan size and term. SBA sets the schedule each fiscal year and has changed it often, so check the current SBA fee notice before you budget.

Rates are negotiated between borrower and lender and tied to a base rate. Lenders typically ask for a business plan, financial statements, tax returns and a personal guarantee.

The 504 loan is the fixed-asset tool. It finances land, buildings, long-life machinery and some energy projects. It is not a working capital loan. The SBA-backed portion tops out at $5 million, or $5.5 million for manufacturing and energy projects.

A 504 deal usually has three parts: a bank loan, a certified development company loan backed by the SBA, and the borrower's down payment. Use the 504 for buildings or heavy equipment. Use the 7(a) for flexible cash for operations, inventory or mixed purposes.

Both programs require a small business under SBA rules that operates for profit in the United States.

Microloans and Community Advantage for smaller asks

Not every founder needs a large loan. SBA microloans are made through nonprofit intermediaries and are capped at $50,000. They suit working capital, supplies, fixtures and small equipment.

The intermediary's rate is capped under SBA rules and is set above the intermediary's own cost of funds, with the cap depending on loan size. Confirm the rate in your own loan offer, because intermediaries price within those limits differently.

Microloan intermediaries often require technical assistance before or after disbursement. That assistance is part of the product.

Community Advantage is an SBA-backed option that lets mission-focused lenders make smaller loans to businesses in underserved markets. It began as a pilot. Check the SBA site for its current name, rules and lender list before you plan around it.

Compare the total cost, not the rate alone. Fees, closing costs and the repayment schedule decide what the money really costs. A higher rate with a longer term can be cheaper per month.

Ask the intermediary what reporting it requires. Missing reports can be a loan covenant issue even when payments are current.

SBIR Phase I and STTR: grants that are not loans

SBIR is a set-aside program. Agencies with large research budgets reserve a share of their funds for small businesses. Eleven federal agencies run SBIR, including the Department of Defense, NASA, the Department of Energy, the National Science Foundation and the National Institutes of Health. The money is awarded as contracts or grants, not loans.

SBIR has three phases. Phase I tests feasibility and proof of concept. Phase II funds the main research and development. Phase III moves toward commercialization, often with money from outside SBIR. The original statutory guideline for Phase I was $150,000. SBA adjusts that figure for inflation and agencies set limits per solicitation, so check the current SBA directive and the award limit stated for your topic.

SBIR Phase I is the entry point. You propose a technical question and a plan to answer it. You do not need a finished product, but you need a credible technical approach.

STTR is the sibling with a partner requirement. The small business works with a nonprofit research institution, such as a university or federal lab, and must still do a substantial share of the work. Choose SBIR when your company can do the work itself. Choose STTR when a university lab is central.

Grant vocabulary differs from loan vocabulary. You write a technical volume, a cost volume and a commercialization plan, and you report progress against milestones. You do not pledge collateral.

Agencies publish solicitations with topics and deadlines. You must respond to an open topic. A strong idea outside the topic list will not be reviewed.

SBA size standards decide which words you are allowed to use

Before you apply for anything, check whether your business is small under SBA rules. The SBA size standards tool matches your industry code to a size threshold.

Size standards are set by industry, using North American Industry Classification System (NAICS) codes. A firm that is small in one industry may be large in another. Most manufacturing and mining standards use employee counts. Most retail, service and construction standards use average annual receipts.

Size affects more than loans. It matters for SBIR eligibility, some government contracting set-asides and certain SBA programs. Affiliates, meaning businesses under common control, can be counted with yours and push you over a threshold.

If you are near a threshold, document your calculation. Keep the industry code and the receipts calculation in your files, because lenders and agencies may ask how you arrived at your number.

Investment capital, SBIC and revenue-based financing

Equity investment is not a loan and not a grant. An investor gives money in exchange for ownership or a convertible right. The company does not repay it in the usual sense, but it gives up a share of future value.

SBIC stands for Small Business Investment Company. These are privately managed funds licensed by the SBA. They invest in small businesses using private capital plus SBA-backed leverage. SBIC investment can take the form of debt with equity features or straight equity. The fund expects a return, usually through growth or an exit. The vocabulary is valuation, equity stake, dilution and exit.

Revenue-based financing is private, not an SBA or SBIR program. The company repays a share of future revenue until a set cap is reached. Compare the total repaid with the total cost of a loan before you choose it.

Bootstrapping means funding growth from sales you keep in the business. Customer deposits and prepayments work the same way. Neither creates a repayment or ownership obligation, but both limit how fast you can grow.

Equity raises fall under securities rules. Many private placements rely on Regulation D, Rule 506 (17 CFR 230.506), under the Securities Act of 1933, and FINRA provides investor education on the basics. Confirm which exemption applies with counsel before you raise money.

Lenders and funds read the same financial statements. The balance sheet shows what you own and owe, the income statement shows profit, and the cash flow statement shows whether cash actually moved. The business acumen guide compares the three statements against what each one answers.

The matching table sits earlier in this article. The figure below repeats it as an image for readers who prefer a visual version.

Free counseling before you pick a program

Small Business Development Centers operate through universities and state networks. SCORE is a network of volunteer mentors, many of them retired executives. Both offer one-on-one counseling, workshops and help with loan packages.

Find local assistance through the SBA's local assistance locator, which shows SBDC and SCORE offices with contact details. Make an appointment before you assemble an application.

Counseling also helps with SBIR and STTR proposal structure, and with checking your size standard calculation. A wrong industry code can send you to the wrong threshold.

Founders who learn earn, spend, borrow and protect as separate skills read a loan term sheet faster. Borrowing carries repayment. Protecting keeps the business alive when revenue dips.

Here is a simple sequence to follow.

Before you submit, run a final check.

The vocabulary is the easy part once the family is right. Pick the family first, then learn the words that belong to it.

Common questions