The Ultimate Guide To SBA Microloans

Businesses that want smaller loans aren’t just stuck with high-interest, short-term options. The SBA Microloans program is a great way for bsuinesses and startups to receive up to $50,000 with a loan that has competitive rates and terms up to six years.

Keep reading to determine if an SBA Microloan is the right financial choice for your business.

What Is An SBA Microloan?

A microloan is a small amount of money loaned to businesses at low interest rates.

The Small Business Administration (SBA) has its own microloan program. Through this program, eligible borrowers can receive up to $50,000 to use for nearly any business purpose. The program is open to small businesses, startups, home-based businesses, and sole proprietors.

How The SBA Microloan Program Works

The SBA does not distribute funds directly to small businesses. Instead, the SBA provides funding to nonprofit and community-based organizations that serve as designated intermediary lenders and distribute funds to eligible borrowers.

SBA Microloans are different from other SBA loan programs in that the SBA does not set maximum rates, repayment terms, and eligiblity requirements. These details are left to the intermediary lender.

Funds from this program can be used for nearly any purpose, including purchasing inventory and equipment or for use as working capital. However, SBA Microloans can’t be used to refinance debt or purchase real estate.

SBA Microloan Rates & Terms

The maximum borrowing amount for an SBA Microloan is $50,000, although the average loan given is $13,000.

Interest rates vary, since they are set by the intermediary and not the SBA. Generally, you should expect to pay rates between 8% and 13%. Maximum repayment terms are six years and are set by the lender.

In most cases, a down payment isn’t necessary. However, startups may be required to pay 20% of project costs as a down payment. Business acquisitions may also require a 10% down payment.

SBA Microloan Eligibility & Requirements

To qualify for an SBA Microloan, you must meet the following requirements.

Advantages & Disadvantages Of SBA Microloans

While an SBA Microloan offers a great funding opportunity for many small businesses and startups, it may not always be the right choice for your particular situation. Weigh out the pros and cons and consider your business’s unique financial needs before making the decision.

How To Apply For An SBA Microloan

The first step in the application process is to find an SBA Microloan intermediary that lends in your area.  You can use the SBA’s Lender Match tool, or you can ask your financial institution for a referral.

Some nonprofit intermediaries will allow you to apply online, but most will require you to appear in person or speak to a lending specialist over the phone.

While the lender you work with will provide you with the details of their requirements and all documents needed for processing, there are a few items you can prepare in advance, including:

• Minimum of two years of business and personal income tax returns
• Balance sheets
• Profit and loss statements
• Personal financial statements
• Personal credit report
• Business plan and financial projections
• Business licenses and permits

Once you have gathered all the information required by the lender, your application will be complete. The entire process generally takes between 30 and 90 days. However, some lenders may get your funds to you as quickly as two to three weeks.

Some lenders may require classes, workshops, or other training as part of the application process. Others offer these programs but may not require them before disbursing funding. This training provides great opportunities for startups and small businesses and should be taken advantage of whenever possible.

Alternatives To SBA Microloans

If a Microloan isn’t the best fit, there are different types of small business loans that could be a more suitable choice.

The Bottom Line On SBA Microloans

SBA Microloans can provide the capital that startups and small businesses need to grow. Competitive interest rates and low repayment terms make this an appealing funding option for any business that meets all requirements.

SBA Microloans aren’t for every business, though. Businesses that require more capital or longer repayment terms may want to research the other SBA loan options available.