SBA Microloan Program: A Complete Guide To Fees, Eligibility, & Requirements

As a small business owner, you know the importance of financing to expand your business or start your next project — particularly if you’re running a startup. While there are many options available to provide you with the capital you need to start a new business or grow an existing business, one of the best options is a loan through the Small Business Administration.

For smaller capital requirements, SBA Microloans offer many benefits that make them more desirable than other loan products on the market. What is an SBA Microloan, and is it the right choice for your business? Read on to find out more.

What Is An SBA Microloan?

Before getting into the details of the SBA Microloan programs, let’s first understand what a microloan is. Microloans are small amounts of money loaned to businesses at low-interest rates.

The SBA Microloan program offers small loans of up to $50,000 to small businesses and startups. An SBA microloan can be the ideal choice for a business that doesn’t require a lot of capital and wants a low-interest loan with great repayment terms. Home-based businesses and even self-employed individuals can obtain Microloans through the SBA lending program.

How The SBA Microloan Program Works

To receive a Microloan, borrowers work with a nonprofit or community-based organization that serves as an intermediary for the SBA. Small business owners and startups can apply for up to $50,000 through an intermediary’s loan program. The minimum amount available is $500. On average, businesses obtain loans of $13,000 to $14,000 through the Microloan program.

One thing that is different about the SBA Microloan program when compared to other SBA funding programs is that the SBA does not set the rates and terms. The $50,000 borrowing cap is set by the Small Business Administration, but further details — including terms, rates, and eligibility requirements — are set by the intermediary organization.

Funds from the SBA Microloan program can only be used for certain purposes. This includes the purchase of inventory, supplies, fixtures, furniture, or equipment, or for use as working capital or startup capital.

SBA Microloan Eligibility & Requirements

The SBA Microloan program is designed for established small businesses and for-profit startups. It is a great option for small businesses that need only a small amount of funding but still wants to enjoy the benefits of an SBA loan product, including competitive interest rates and longer payment terms.

To qualify, applicants must meet the following SBA Microloan program requirements.

Industry Experience

Because the loan amounts are small, the Microloan program is great for home-based businesses and the self-employed. Nonprofit daycare centers are also eligible to receive these loans. All small businesses and startups are eligible to apply for an SBA Microloan. However, companies that need larger funding amounts (up to $5 million) or would like to purchase a business or refinance debt should consider other SBA options, such as the 7(a) loan.

All businesses receiving an SBA Microloan should have a minimum of two years of industry experience.

Good Or Excellent Credit

Since the terms of micro-funding for small businesses are set by the lender, SBA Microloan credit requirements vary. On average, though, an applicant should have a credit score of at least 640 when applying for one of these loans. Some lenders may be more flexible in determining applicants’ creditworthiness, so it’s important for interested business owners to speak with their local nonprofit lender to find out more specific details.

Any derogatory entries on a credit report will need to be explained to potential lenders. In some cases, a co-signer with sufficient credit and income to repay the loan may be required. It’s also important to note that there must be no bankruptcies or foreclosures listed on a credit report from the last one to two years, in most cases.

Some lenders will provide SBA Microloan bad-credit funding for those with less-than-desirable credit scores. Personal credit scores as low as 575 have been approved on occasion when all other requirements for SBA Microloans are met. To know where you stand in terms of credit, you can easily obtain your free credit score online. From there, you can determine what you need to do to clean up your credit and raise your score, if necessary.

Collateral

Most lenders also require some form of collateral, but again, this is at the lender’s discretion. A lien on personal property, such as a vehicle or house, may be required. A personal guarantee from all owners with a 20% stake in the business is typically required as a condition of obtaining these loans.

Ability To Repay The Microloan

All applicants for SBA Microloans must show sufficient income to repay the Microloan. Additionally, applicants should be able to show a positive financial outlook for the future of their business. This is why it is important to have a business plan prepared to show to potential lenders, especially for startups.

Cleaning up your credit score, creating a professional and solid business plan, and being prepared to offer up collateral or a personal guarantee are all ways that you can boost your odds of receiving an SBA Microloan.

SBA Microloan Terms & Rates

The SBA Microloans program provides business owners with up to $50,000 for qualified expenses. SBA Microloan rates generally start at 8% with maximum repayment terms of up to six years. A down payment of 10% to 20% may be required based on the borrower’s time in business and purpose for using funds.

• Maximum Borrowing Amount: $50,000
• Average Interest Rate: 8%-13%
• Other Possible Fees: Closing fees; annual contribution up to $100
• Term Length: Up to six years
• Repayment Frequency: Monthly
• Collateral Requirements: Personal guarantee; assets

Unlike with other SBA loan products, SBA Microloan terms and rates vary from lender to lender. That is because the SBA does not set these standards. However, there are some averages across SBA Microloan lenders to give you a better idea of what you should expect when repaying your loan.

SBA Microloan interest rates vary from 8% to 13%, making them competitive with other types of business loan products. The repayment terms are set by the lender, so this value varies, but the maximum repayment term for any SBA Microloan is six years. The maximum loan amount that can be obtained through this program is $50,000, although the average loan given is less than half this amount.

A down payment is not always necessary for obtaining an SBA Microloan. For startup micro-funding, an average of 20% of the project will be required as a down payment. Business acquisitions may require a 10% down payment. However, in many cases, 100% financing is available with no required down payment from the borrower, assuming that all other conditions are met.

Is An SBA Microloan The Right Choice For My Business?

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. Keep reading to determine if an SBA Microloan is a good financial option for your business…or if you should consider other funding.

SBA Microloans Advantages & Disadvantages

When An SBA Microloan Is The Right Choice

Small businesses that need smaller loans of $50,000 and want low-interest rates and longer repayment terms will benefit from receiving an SBA Microloan.

New business owners and smaller businesses that have had difficulties securing a bank loan may also consider an SBA Microloan. The more flexible SBA Microloan requirements make it easier for businesses to qualify, especially for underserved borrowers.

SBA Microloans also have few restrictions when it comes to how funds are spent. That makes these funds a great option for purchasing equipment, buying supplies or inventory, or for use as working capital.

When You Should Look For A Different Option

An SBA Microloan isn’t a suitable choice for borrowers that need more than $50,000.

SBA Microloans aren’t for borrowers with poor credit. Although credit requirements are more flexible than banks are, borrowers will need a solid credit score to qualify. If the borrower’s credit falls below the lender’s minimum, a Microloan may still be obtained with a creditworthy cosigner.

While SBA Microloans can be spent in many ways, borrowers that need funds to refinance debt or purchase real estate will need to consider other funding options.

Borrowers that need funds fast will want to explore other lending options, as it may take weeks or longer to receive an SBA Microloan.

Finally, borrowers who don’t have the funds for a down payment or lack collateral to back the loan may have to look for other funding options.

Alternatives To SBA Microloans

An SBA Microloan isn’t the best option for any business. If this isn’t the right fit for you, there are a number of funding options that could be more suitable.

• Business Credit Cards: A business credit card offers fast access to cash that can be used for any purpose, from purchasing inventory to covering an emergency expense. Applying for a business credit card is quick and easy. There are even options available for borrowers with low credit scores or limited credit history.
• Equipment Financing: Equipment financing is a way to purchase equipment without the stringent requirements of an SBA Microloan. Borrowers can get funded quickly and have the option to finance or lease the equipment of their choice.
• Invoice Factoring: If unpaid invoices are impacting your finances, consider invoice factoring. You can instantly receive the money you’re owed — less a lender’s fee — even if you haven’t been in business for long or have a poor credit history.
• Peer-To-Peer Lending: Peer-to-Peer (P2P) lending is an option for borrowers with decent credit scores. This option is best for borrowers that haven’t been in business long, don’t want restrictions on how funds are used, or that need funds fast.

Still on the fence? Keep exploring your options to find the funding that works for you. Whether it’s low-interest rates, longer repayment terms, or fast and easy funding, there’s an option out there for you. Start your search by checking out 12 Different Types Of Small Business Loans You Should Know.

How To Apply For An SBA Microloan

Before getting into the specifics of the SBA Microloan application process, it’s important to remember that the entire process for receiving funding through this program generally takes between 30 to 90 days. It’s important to gather all the information you’ll need to submit ahead of time to avoid potential delays.

The first step in the application process is to find an SBA Microloan intermediary that lends in your area.  To do this, you can get referrals from any financial institution where you have an established relationship. You can also use the Small Business Administration’s Lender Match tool to help you find lenders for Microloans and other SBA loan products.

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

Please note that this is not a comprehensive list. Since there are no set requirements by the SBA for microloans, necessary documentation will vary by lender.

Once you have gathered all the information required by the lender, your application will be complete. As previously noted, the entire application and funding process generally takes between 30 to 90 days. However, some loans may be processed, approved, and funded within two to three weeks, depending on the lender. 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.

SBA Microloan FAQs

Final Thoughts

SBA Microloans can provide startups and small businesses with the capital they need to grow their business further. The low-interest rates and repayment terms up to six years make it an appealing funding option for the business that doesn’t want to take on piles of debt. With the right paperwork, a decent credit score, and a solid business plan, many businesses won’t have any problem obtaining competitive financing through this program.