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SBA Microloans: The Essential Guide

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The US Small Business Association enables some lenders to offer SBA loans, considered the gold standard of small business financing. While most SBA loans are designed for established businesses, SBA Microloans are intended explicitly for startups and new business owners.

The SBA microloan could be a valuable option if you’re an aspiring entrepreneur or a new business owner and need financing to grow. But, the loan comes with some specifics to know before you apply.

In this guide, you’ll learn about the SBA microloan program and how to apply. Specifically, we will answer these questions and more:

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    What are SBA Microloans?

    Microloans are a subset of the SBA loan program. The US Small Business Administration (SBA) authorizes and administers the various loan packages available under SBA loans.

    sba microloans,

    Most SBA loans are for larger borrowing amounts and only apply to established businesses. The SBA Microloan, however, is designed specifically for startups and newer small businesses. The maximum loan amount for the SBA microloan is $50,000, and the average is $13,000.

    While most new small business owners can apply for an SBA microloan, the program is specifically beneficial to minority entrepreneurs. One of the program’s goals is funding new businesses in underserved communities.

    SBA microloans are available for new for-profit businesses and certain nonprofit childcare facilities.

    How does the SBA Microloan Program work?

    Microloans are the only SBA loan program where the SBA provides the funding. In most SBA loans, the funding comes from a third-party lender.

    The SBA supplies funding to approved nonprofit community-based lenders, acting as intermediary lenders to the microloan applicants. The specially designated intermediary lenders possess experience in lending and provide managerial and technical assistance to eligible borrowers.

    Borrowers can use the SBA microloan proceeds for various business purposes that help establish and grow their companies. Examples include:

    Borrowers cannot use the funds for:

    Borrowing Amounts, Terms & Interest Rates

    • As stated, the maximum borrowing amount is $50,000, with $13,000 being the average.
    • Terms go up to 6 years at the most. The terms you receive depend on the intermediary lender and how you intend to use the funds.
    • Interest rates typically range between 8%-13%, depending on the lender.

    Who qualifies for an SBA Microloan?

    The qualifications for the SBA microloan depend on the specific intermediary lender. Each lender sets their own requirements. However, since the loans are intended for new businesses and underrepresented entrepreneurs, the qualifications are typically lower than other SBA loans.

    In general, SBA microloan borrowers need to provide collateral for the loan. In addition, you will need to sign a personal guarantee, which is a promise to repay the loan. If you default on your loan, the lender can seize your personal assets as repayment.

    How do I get an SBA Microloan?

    SBA microloans require working with an approved intermediary lender. You can access the SBA’s list of lenders to find one in your area.

    Typically, you will contact a lender in your district to complete the application process. The SBA provides the funding for the loan through the lender.

    Before applying, you should prepare your documents for the loan. While the exact documentation requirements vary between lenders, you should prepare the following:

    • Personal tax returns for the previous two years.
    • Recent paystubs or other proof of income.
    • Documentation on available collateral, including any relevant titles or deeds.
    • Your business plan & cash flow projections.
    • Any contracts, invoices, quotes, or purchase agreements.

    If your business is already established and you’re applying for funds to grow the business, you also need to prepare some financial documents. You should prepare the following:

    What are the advantages of SBA Microloans?

    The primary benefit of the SBA microloan program is providing funding to entrepreneurs who otherwise couldn’t get financing. Although the exact qualifications depend on the lender, most requirements are lower than traditional business loans.

    For example, since the microloan is intended for new business, most don’t require a certain amount of time in business or annual revenue. While the better your credit score, the more likely you’ll get approved, most personal credit score requirements are lower than other SBA loans. Some lenders don’t look at your credit report at all.

    The SBA microloan program also helps fund minority entrepreneurs in underserved areas. In 2021, 46% of SBA microloan recipients were women.

    What are the disadvantages of SBA Microloans?

    SBA microloans are intended for startups or recently established businesses, which precludes many companies with two or more years in operation. The loan amounts cap out at $50,000.

    Qualifying for an SBA microloan depends entirely on the requirements of the intermediary lenders in your area. You must work with one of these nonprofit organizations to apply for and receive an SBA microloan.

    Pros & Cons

    Pros:

    • Available to new business owners with lower credit scores or no credit history.
    • Funds are meant specifically for startups and new businesses.
    • Provides funding to businesses in underserved communities.
    • Helps promote entrepreneurship among minorities.
    • Many intermediary lenders provide additional services like management training and business development courses.

    Cons:

    • Only available to newer & startup businesses.
    • Low maximum borrowing amount is $50,000.
    • Requires working with an intermediary lender.
    • Qualifications vary significantly depending on the lender.

    Frequently Asked Questions

    Here are the most common questions about SBA microloans.

    Can I get an SBA Microloan with bad credit?

    Depending on the lender, getting a microloan with poor credit might be possible. Some lenders don’t have any credit score requirements. Check with the lenders in your area. If you don’t qualify for any SBA loan programs because of poor credit, there are bad credit business loans you may be approved by alternative online business lenders.

    Are there other SBA Loan Options?

    Yes, more established businesses should consider one of the following SBA loan options:

    What are other Small Business Loans available?

    There are some microloan programs outside of the SBA. For example, USDA provides microloans, called FSA loans – named after the Farm Service Agency that developed them.

    Not every business qualifies for an SBA loan. Fortunately, there are plenty of small business loan options outside the SBA program. Consider one of the following loans if you can’t qualify for a loan through the SBA:

    SBA Microloan – Final Thoughts

    SBA microloans are an excellent option for younger businesses and startups to get the funding the grow. While the maximum loan amounts are low, it’s much easier to qualify for this type of loan.

    Contact us if you need more information on SBA microloans or want to consider another small business loan option.

    We will help you grow your small business.

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