SBA Microloans: A Comprehensive Guide To Terms, Rates, & Eligibility

As a small business owner, you know the importance of financing in order to expand your business — particularly if you’re running a startup, and you know that you need funding in order to start your next project. 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. Is an SBA Microloan the right choice for your business? Read on to find out more.

What Is The SBA Microloan Program?

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 is designed to offer small loans of up to $50,000 to small businesses and startups. A 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 Do SBA Microloans Work?

While many SBA loan products are available through traditional financial outlets (banks, private lenders, and credit unions), the Microloan program is different in that funds are provided through non-profit or community-based organizations.

A non-profit organization can receive funding of up to $750,000 from the SBA during its first year in the Microloan program. After the first year, up to $1,250,000 can be borrowed annually, with a cap of $5 million at any one time. The nonprofit organization then acts as an intermediary, providing loans to small business owners.

Small business owners and startups can apply for up to $50,000 through a nonprofit’s loan program. The minimum microloan 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 rates and terms are not set by the SBA. 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

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 want to enjoy the benefits of an SBA loan product, including competitive interest rates and longer payment terms.

Because the loan amounts are small, the Microloan program is great for home-based businesses and the self-employed. Nonprofit day care centers are also eligible to receive these loans. In fact, 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 and must be able to show sufficient income for repayment of the loan.

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 the creditworthiness of applicants, 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 in order to clean up your credit and raise your score, if necessary.

Most lenders also require some form of collateral, but again, this is at the discretion of the lender. 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 one of these loans.

In addition to having a good credit score, collateral, and a personal guarantee, applicants for SBA Microloans should be able to show a positive financial outlook for the future of their business. This is why it is important to have a solid 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 for receiving an SBA Microloans.

SBA Microloan Terms & Rates

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

The interest rates for SBA Microloans vary from 6.5% 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 6 years. As mentioned earlier, 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 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.

How To Apply For SBA Microloans

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

To begin the application process, the first step 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, which can 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 and because 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, although 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 to disperse funding. This training offers great opportunities for startups and small businesses and should be taken advantage of whenever possible.

Is An SBA Microloan The Right Choice For Me?

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. If you’re looking for more than $50,000 in funding or need faster funding, an SBA Microloan may not be the best choice for you.

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Some other options to consider include:

Business Credit Cards

If you want more flexibility with your funds, a business credit card may be a more attractive option. Business credit cards can be spent any way you want without the limitations you may encounter with an SBA Microloans. Business credit cards are quickly obtainable and can be put into use immediately, making them an ideal choice for those who need funding fast. Many credit cards offer high credit limits close to or even exceeding the $50,000 limit of SBA Microloans.

It’s important if you go this route to shop around for the best rates. Some business credit cards offer 0% introductory APRs followed by interest rates that are similar to SBA Microloan rates. Some cards also offer extra benefits to the borrower—think airline miles, cash bonuses, and other perks just for using the card.

Equipment Financing

If you need to purchase equipment for your business, equipment financing may be an option. Equipment financing typically doesn’t have as many stringent requirements as obtaining an SBA loan, and funding can be acquired much faster. This can be a great option for someone who needs equipment immediately or who may not have the credit score or other requirements needed for the SBA Microloan program.

If you decide to get financing for equipment, you have two options: equipment loans and equipment leases. Equipment loans typically require a higher payment, but when the load is paid off, you own the equipment free and clear. With leases, monthly payments may be lower, but you’re only borrowing the equipment. If what you are purchasing is something that is needed for your business at all times, a loan may be the better option.

Peer-To-Peer Lending

If you have a decent credit score and you want to receive funding fast, peer-to-peer lending is an option you can explore. The typical credit score requirement for this type of loan is 670, but will vary by lender. With this option, you can receive comparable interest rates and payment terms to SBA Microloans without having to wait weeks for the approval and release of funding. There are no limitations on how peer-to-peer loan funds are used.

Invoice Factoring

If you have unpaid invoices that are affecting your cash flow, invoice factoring is something you may consider. With invoice factoring, you work with a lender who pays money on your unpaid invoices in exchange for a fee, which varies by lender. This immediately gives you the capital you need for any business expense without having to wait for payment on outstanding invoices. There are typically very few requirements for this type of loan, making it an appealing option for anyone with fair or poor credit. Usually, a business must be in operation for at least three months to qualify for this type of loan. Once the money is received, it can be used for any purpose with no limitations.

If you’re still unsure of which business loan is right for you, do some research online before signing on the dotted line. You can compare the different types of small business loans to find out which offer the terms, rates, and other details that will best benefit you and your small business.

Final Thoughts

SBA Microloans can provide startups and small businesses with the capital they need to further grow their business. The low-interest rates and repayment terms up to 6 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 in place, many businesses won’t have any problem obtaining competitive financing through this program.