SBA Microloan Eligibility, Terms, and Cost
Through the SBA Microloan Program, the Small Business Administration (SBA) loans money to intermediary nonprofit lenders. These lenders then provide business loans of up to $50,000 to startups and small businesses, many of them run by women, minorities, or veterans. In 2017, the average microloan was around $14,000.
Businesses can use SBA Microloans for a range of purposes, including working capital or buying equipment, machinery, or supplies.
- You need less than $50,000 of capital and have good credit and a solid business plan.
- You need more than $50,000 of capital or have poor credit.
SBA Microloans are a great option both for businesses that are just starting out, as well as for more established businesses. Find out everything you need to know to decide if these SBA loans are right for you.
SBA Microloans: How They Work
An SBA Microloan is a loan of up to $50,000 from an intermediary nonprofit to the owner of a small business or startup. The money originates from the SBA, which initially lends the money at a discounted rate to the intermediary.
In other words, there’s a multi-step process.
SBA Microloans are the most accessible types of SBA loans, and they’re a great option for aspiring entrepreneurs with a plan of action. Many of these loans are SBA loans for women, minorities, veterans, low-income, or from other represented groups, but they are available to any for-profit small business (non-profit child care centers are also eligible for Microloans). SBA microloans are often synonymous with SBA startup loans as well.
Other than establishing some parameters around interest rates and eligible loan uses, the SBA generally takes a backseat on these SBA loans (in contrast to some other SBA programs, where the agency plays a more active role). The agency leaves a lot of discretion to intermediary SBA lenders to decide the terms and which borrowers should receive Microloans. The SBA does not even review the loan applications for creditworthiness.
The SBA Microloan Program
Eligibility for SBA Microloans
As we already mentioned, the SBA doesn’t review Microloan applications for creditworthiness. But they do set some basic parameters around eligibility in their SBA loan requirements. The intermediary that you work with will also have their own qualification criteria.
Here’s what you need to have to be eligible for an SBA microloan.
For-profit small business
To qualify for an SBA Microloan, you should have a for-profit small business. However, non-profit childcare centers are eligible for SBA Microloans.
Most microlenders don’t require excellent credit. In fact, the average minimum credit score of borrowers that most intermediaries work with is 575. Microlenders are used to dealing with borrowers who have a limited credit history, are rebuilding credit, or have less-than-perfect credit scores. Certain things in your credit history, such as recent bankruptcies or foreclosures, might make qualifying more challenging.
If your credit score is low, you’ll need to show strength in other areas of your application. For example, is your business generating good revenues? Do you have valuable collateral? Do you have someone who can co-sign the loan? Answering “yes” to any of these questions can make up for a bad credit score.
Ability to repay the loan
At the end of the day, microlenders, like all lenders, really only care about one thing: Can you pay back the loan on time? You can show ability to repay in one of two ways—from existing cash flow of the business, or if the business isn’t generating revenue yet, from financial projections.
All businesses have to submit a business plan to qualify for an SBA Microloan, but a business plan is especially important for new business that aren’t generating revenue yet. It’s your opportunity to convince the lender why they should trust your business to repay the loan on time.
The business plan should outline the following:
- Background on you and business management
- Your business’s value proposition
- Analysis of target market and competitors
- Description of marketing and growth strategies
- Financial statements and/or financial projections for 3 to 5 years
Think of your business plan as an opportunity to showcase your business to the lender. A clear understanding of your business’s products and services and your financial standing will go a long way towards that.
Collateral and personal guarantee
SBA Microloans generally require collateral. Collateral assures the lender that they will be able to get their money back if you default on the loan. Business assets (e.g. equipment, accounts receivables, real estate, etc.) can serve as collateral, as can personal assets (e.g. your car, home, personal property, etc.). In most cases, any assets that you purchase using the loan proceeds also become collateral.
In addition to collateral, you’ll need to sign a personal guarantee on the loan.
To get an SBA Microloan, you should also demonstrate “good character.” This usually means that you shouldn’t have a criminal record with crimes of dishonesty, like fraud, theft, or burglary. Having a record doesn’t automatically disqualify you from consideration, but makes the path more difficult.
Alright, now that we’ve covered how SBA Microloans work generally, let’s take a look at how they can work for your business. Though the specific terms your SBA Microloan comes with will depend on your intermediary lender, they SBA sets specific ranges and guidelines for terms that every microloan intermediary lender has to adhere to.
SBA Microloan Terms and Cost
The original funds for SBA Microloans come from the SBA, which loans money to intermediaries. The SBA loans the money at a big discount, so the cost and terms to the final end borrower (you!) are also reasonable.
Here’s a look at the typical terms of an SBA Microloan.
SBA Microloan Amounts
The maximum amount you can borrow through the SBA Microloan program is $50,000, but the average loan size in 2017 was $13,884. Some SBA Microloan intermediaries offer loans as small as $500.
Just like any other loan, you can negotiate your loan amount within this range directly with the intermediary lender. The loan amount ultimately depends on your intended use of the microloan and your creditworthiness.
SBA Microloan Term Lengths
As for term lengths, the SBA only sets one stipulation for the SBA Microloan program—repayments terms can never exceed six years. Other than that, you and your intermediary can decide on your SBA Microloan repayment schedule together.
SBA Microloan Interest Rates
The SBA sets parameters around the maximum rates that intermediaries can charge, based on the intermediary’s own cost to borrow funds from the SBA. Under those parameters, SBA loan rates for microloans generally fall between 8% and 13%. The rates definitely vary from intermediary lender to intermediary lender, but the average interest rate in 2019 was 7.5%.
How to Apply for an SBA Microloan
The first step to apply for an SBA Microloan is to find an intermediary near you. There are hundreds of Microloan intermediaries across the country. To make your search easier, the SBA maintains an intermediary search tool that lists lenders in each state.
You can also use the SBA’s list of the top 25 Microloan intermediaries to decide which SBA lender to approach.
Your microintermediary lender will walk you through the remaining process and inform you about what you’ll need to submit with your loan application. Expect the process to take at least two to three weeks. If you need faster funding, consider other quick business loan options.
The Advantages and Disadvantages of SBA Microloans
SBA Microloans are a great, affordable source of capital for business owners who might have tried and failed to get credit from other sources. Business owners looking for small loan amounts often have difficulty with traditional financing. For instance, the average SBA 7(a) loan amount (the 7(a) loan is the SBA’s most popular type loan) is $368,737. For those business owners looking for less capital, an SBA Microloan can be the answer.
But, they are not for everyone.
- Both startups and established companies are eligible
- Good option for traditional underserved entrepreneurs, such as women, minorities, people with disabilities, and veterans
- Good option for entrepreneurs with limited credit histories (e.g. because they are new to the country)
- Good option for sole proprietorships and freelancers or businesses with few or no employees
- Low interest rates
- Long repayment term
- Eligible loan uses are limited—money can’t be used for debt refinancing or purchasing real estate
- Not suitable if you need more than $50,000 in capital
- Loan process can take several weeks
- Must have solid business plan to qualify
- Need to provide collateral; might need a co-signer if you have bad credit
The Best Alternatives to SBA Microloans
Entrepreneurs who are seeking an SBA Microloan typically want small amounts of capital and have fairly good credit history.
These business owners can consider a couple alternatives as well.
B2B businesses often have a lot of cash tied up in unpaid invoices. You can leverage the invoices to get capital that you can use for a variety of business expenses. Invoice financing is available to businesses that have at least three months of operating history.
Business Credit Cards
If you need a relatively small amount of capital, business credit cards can often be a good solution. With high credit limits, rewards points, and sign on bonuses, credit cards offer a myriad of perks. Some cards even come with introductory 0% interest rates. After that, business credit cards have an average interest rate of around 14% to 19%.
Even if you don’t qualify for SBA Microloans, there are a variety of other business financing options available to businesses at all stages.
The Bottom Line
SBA Microloans can be a game changer for startups, microbusinesses, and traditionally underserved entrepreneurs. If you’ve just lost out on a traditional bank loan or other SBA loan program, consider applying for an SBA Microloan. These loans come with reasonable interest rates and a long repayment term. You might not be able to get a lot of capital, but you’ll be able to invest in your business and get moving in the right direction.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.