Finances and Taxes

What is the SBA Microloan Program and How Can I Apply?

Kim Porter  

While some entrepreneurs take on hefty loans to fund their businesses, others can get by with much less. That’s where the Small Business Administration’s (SBA) Microloan option shines. If you need to borrow a smaller amount of money to start or expand a business, the SBA Microloan program could be a good fit. This program connects lenders with borrowers who need up to $50,000 to cover business expenses such as working capital, equipment, and supplies. In fiscal year 2020, 5,890 businesses borrowed $85 million through the program. Here’s everything you need to know before applying.

SBA Microloan Fast Facts

Loan amountUp to $50,000
Loan termUp to eight years
Interest rate Usually ranges from 6% to 9%
Who can applySmall for-profit businesses and nonprofit day care centers
Where to applyAn approved intermediary lender

What are SBA Microloans?

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The SBA Microloan program was designed for small-business owners who are traditionally underserved in the credit marketplace, such as women, low-income individuals, veterans, and minorities. However, you don’t have to fit one of these descriptions to use the program.  

The Small Business Administration doesn’t loan money directly to small businesses. Instead, the SBA lends the money at a discounted rate to intermediary lenders, which are usually nonprofit community-based organizations. Those lenders then set eligibility requirements, determine the loan terms, and lend the money to eligible business owners.

Businesses can borrow up to $50,000 and repay the loan over eight years. In fiscal year 2020, the average loan size was $14,434 with an average interest rate of 6.5%. Participating lenders also provide free marketing, management, and technical training through classes, workshops and one-on-one mentoring. 

What can SBA Microloan funds be used for?

While you probably have a lengthy list of stuff your business needs, the SBA puts limits on what you can do with the money. You can use a Microloan to pay for:

  • Working capital
  • Inventory or supplies
  • Furniture or fixtures
  • Machinery or equipment

But business owners can’t use Microloan funds to pay down existing debts or to buy real estate. And if you’re applying for a loan of more than $20,000, you’ll need to meet a “credit elsewhere” test that demonstrates you can’t get financing with a non-government agency. 

How to apply for an SBA Microloan

If you decide to apply for an SBA microloan, you’ll need to contact one of the agency’s approved intermediary lenders. Whether you can apply online or in person depends on the lender, and once you submit the application, it could take up to 30 days to get the money. Here’s an overview of what to look for:

Eligibility

The SBA doesn’t review microloan applications, but the agency does set some basic eligibility guidelines. Generally, applicants must: 

  • Fit into an eligible category: Businesses must operate as a for-profit small business or a nonprofit child care center.
  • Meet credit requirements: The Microloan program was designed for borrowers who might not qualify for loans elsewhere, so you likely won’t need perfect credit. In fact, you may qualify with a FICO credit score in the low 600s if you’re otherwise a strong applicant. 
  • Show they can repay the loan: The lender will either look at your business’s existing cash flow or its financial projections to see if you can handle the monthly payments. You’ll also need to prepare a business plan that showcases your business’s value proposition and explains its financial standing. 
  • Put up collateral. Collateral offers protection to the lender. If you fall behind on payments, the lender can liquidate the asset and pay off your loan balance. You might be able to secure the loan using business assets or personal property.
  • Make a personal guarantee: This is a legally binding promise to the lender that you’ll personally pay off the loan if your business defaults on loan payments. 
  • Be located in an area served by the lender: Lenders usually work within a geographic footprint. If there are no qualified lenders near you, then you might not qualify for a Microloan.

The lender you work with may also have its own requirements. For example, you might have to complete a free training program before receiving the loan funds.

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Terms and conditions

How much you can borrow depends on your creditworthiness and how you intend to use the loan funds. The maximum Microloan amount is $50,000, though the average loan size in 2020 was much lower: $14,434. Lenders can charge “reasonable packaging fees” of up to 3% of the loan amount and any closing costs to administer the loan.

The longest Microloan term was six years, but this has recently increased to eight years thanks to the CARES Act. It’s scheduled to drop back down to seven years on October 1, 2021.  

Borrowers pay an average interest rate of 6.5%, but here’s how it works behind the scenes: The SBA first charges intermediaries an interest rate based on the five-year Treasury rate. Then, lenders can add up to 8.5 percentage points to whatever rate they’re paying to the SBA. Most borrowers wind up paying an interest rate between 6% and 9%.  

Documents needed

The lender can walk you through the application documents, which may include: 

  • Loan application
  • Business plan 
  • Two years’ worth of financial projections
  • Personal and business tax returns 
  • Financial statements for your assets
  • Personal and business credit reports
  • Business licenses and permits

Benefits under the new COVID-19 relief package

Under the Consolidated Appropriations Act that was passed in December 2020, the SBA Microloan program received $57 million to enhance its offerings. Here are some of the ways it can help you:

Longer loan terms

Borrowers now have eight years to repay their Microloans. (Keep in mind: The term for new loans drops to seven years on October 1, 2021.)

More chances to receive a loan

Intermediary lenders may borrow up to $10 million from the SBA (an increase from $6 million), making it easier to deploy more Microloans to small businesses.

More funding for training programs

It’s now easier to request technical assistance funding from your lender, especially if they serve a rural area.

Principal and interest payment coverage 

The SBA will cover up to six months of principal and interest payments, along with fees associated with the loan, for all loans approved between February 1, 2021, and September 30, 2021. 

The payment coverage began in 2020—and if you took out a Microloan before March 27, 2020, you’ll get an additional three months of coverage (bringing it up to nine months). Once those nine months have been exhausted, borrowers may receive an additional five months of coverage. 

The limit on this benefit is capped at $9,000 per month, and borrowers won’t have to apply for it—the SBA will automatically apply these payments. The payments are not counted as taxable income. Some fine print: If you have several outstanding SBA loans, the agency will only cover principal and interest payments for one of those loans. See section 1112 of the CARES Act and check in with your CPA to see how any fine print may apply to your loan(s). 

Pros and cons of the SBA Microloan program 

A Microloan might be enough to cover some or all of your business expenses, but you’ll need to weigh the pros and cons before applying:

Pros

  • Better chance at qualifying: If a traditional lender has denied your application for a business loan, you may have a better chance of getting approved for an SBA Microloan. 
  • Lengthy loan terms: SBA Microloans have loan terms up to eight years, which helps keep monthly payments affordable. 
  • Low interest rates: You can negotiate the rate with the lender, but APRs are relatively low—especially for borrowers with a spotty credit history. In fiscal year 2020, the average SBA Microloan interest rate was 6.5%.  
  • Help with your application: Intermediary lenders can help you through the application process and answer any questions you have.

Cons

  • Small loan amounts: The SBA says intermediary lenders have to maintain a loan portfolio average of $15,000. So although you can technically borrow up to $50,000, smaller loans are more common. 
  • Limited availability: The SBA Microloan program is available nationwide, but not every state or region has a participating intermediary. And because lenders often limit their loans to businesses within their region, you might have difficulty finding funding in your area. 

Who should borrow an SBA Microloan?

Here’s a good rule of thumb: If your small business needs to borrow up to $20,000 for qualified expenses, you need several years to repay the loan, and you can’t find financing elsewhere, the Microloan is a great option. 

Applicants who need to borrow more than $20,000 will need to show they’re struggling to qualify for credit through non-government programs. And if you’re looking for more than $50,000 or need the money for nonqualified expenses, you might be better off with another financing option. 

Alternative loan options 

If you’re looking for funding options but don’t qualify for an SBA Microloan, you might consider another option. Here are just a few:

  • Other SBA loans: Small-business owners can borrow up to $350,000 through the SBA 7(a) Express Loan program with an impressive 36-hour turnaround. Another option, the SBA EBL Bridge Loan, provides up to $25,000 for small-business owners who have been impacted by the coronavirus pandemic.

Business credit cards: If you need a relatively small amount of capital, business credit cards are often a good solution. The best ones come with high credit limits, rewards programs, and business-friendly perks like expense-tracking software. The average APR on this type of card ranges from 14% to 22%—but you won’t have to worry about paying interest if you pay off your balance every month.  

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Updated: March 1, 2021

Kim Porter
Kim Porter Kim Porter covers personal finance topics for AARP The Magazine, Bankrate, U.S. News & World Report, Reviewed, Credit Karma, and more. When she’s not writing, you can find her training for her next race, reading, or planning her next big trip. Twitter | LinkedIn

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