While some entrepreneurs take on hefty loans to fund their startups, others can get by with much less. That’s where the U.S. Small Business Administration’s (SBA) Microloan option shines. The SBA Microloan program could be a good fit if you need to borrow a smaller amount of money to start or expand a business.
This program connects lenders with borrowers who need up to $50,000 of business financing working capital, equipment, and supplies. Here’s everything you need to know before applying.
SBA Microloan fast facts
| Loan amount | Up to $50,000 |
| Loan term | Up to six years |
| Interest rate | Usually ranges from 8% to 13% |
| Who can apply | Small for-profit businesses and certain not-for-profit childcare centers |
| Where to apply | Contact microlenders who are SBA-approved intermediary lenders |
What are SBA Microloans?
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 SBA does not loan money directly to small businesses. Instead, the SBA lends the money at a discounted rate to SBA-approved intermediary lenders, usually nonprofit community-based organizations. Those lenders issue the small business loans, 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 six years. The average loan size is about $13,000. 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 limits 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
Note that business owners can’t use Microloan funds to pay down existing debts or to buy real estate. They are utilized to rebuild, re-open, repair, enhance, or improve your small business. And if you’re applying for a loan of more than $20,000, you’ll need to meet a “no credit elsewhere” test that demonstrates you can’t get financing at comparable interest rates with a non-Federal sources.
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 at least 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 not-for-profit childcare 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 minimum 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.
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 is much lower: $13,000. 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 repayment term is six years. Most Microloan borrowers wind up paying an interest rate between 8% and 13%. But here’s how it works behind the scenes: The SBA first charges intermediaries a base interest rate applicable to the obligations of the five-year US Treasury Bill Rate. That can be discounted by 1.25% to 2% based on the intermediary’s historical portfolio and the average size of those Microloans. Then lenders can add up to 8.5 percentage points to whatever rate they’re paying to the SBA.
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
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. This can apply to new businesses and startups, too.
- Lengthy loan terms: SBA Microloans have loan terms up to six years, which helps keep monthly payments affordable.
- Low interest rates: You can negotiate the rate with the lender, but annual percentage rates (APRs) will be higher for borrowers with a spotty credit history.
- Help with your application: Intermediary lenders can help you through the application process, provide technical assistance, and answer any questions you have.
Cons
- Small loan amounts: Although you can technically borrow up to $50,000, smaller loans are more common. Lending and credit requirements vary, and the business owner needs to provide collateral and a personal guarantee.
- 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?
The Microloan program is a great fit for minority-owned and women-owned businesses. But it’s open to any business that fits the criteria. 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 some:
- Other SBA loans: Small-business owners can borrow up to $500,000 through the SBA Express loan program with an impressive 36-hour turnaround. There’s also the SBA 7(a) Small loan that also grants borrowers up to $500,000. Unlike the SBA Express loan, the Small 7(a) loans have longer application processes and are typically processed by the SBA in up to 10 business days. SBA.gov provides more info on these and other 7(a) loans.
- 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, such as expense-tracking software. The average APR on this type of card can be as high as around 22%—but you won’t have to worry about paying interest if you pay off your balance every month.
