SBA Microloans: Rates, Requirements, and Applications

What is an SBA microloan?

The SBA microloan program consists of small loans sponsored by the Small Business Administration. However, these loans do not come directly from the SBA to the borrower. Instead, the SBA provides funds to a network of intermediary lenders, such as community-based nonprofit lenders.

This network then provides small loans to eligible small businesses and certain childcare centers. The participants in the network of non-profit lenders were chosen not only for their experience in lending, but also for management and technical assistance, so that these intermediaries can manage the microloan program effectively.

SBA micro loans provide financing to typically underserved businesses, such as startups, women-owned companies, and minority-owned businesses.

Eligible businesses can borrow up to $50,000, but according to the SBA, the minimum loan amount is $13,000.

What can SBA microloans be used for?

Small loans can be used for many purposes, giving small businesses flexibility when they need to rebuild, reopen, repair, or improve their business.

Looking for an SBA microloan can be a solution if you are looking for:

However, you cannot use an SBA microloan to pay existing debts, settle lawsuits, trade disputes, fines or penalties, or buy real estate. You also cannot use an SBA microloan for personal, non-business use.

SBA microloan requirements

The SBA microloan program is designed for early stage businesses and startups, but all for-profit small businesses and certain non-profit day care centers are eligible.

Because SBA microloans target early stage businesses and underserved business segments, the educational requirements are less stringent than other types of conventional loans. Even if you have a limited credit history or low income, you may qualify.

Of course, each intermediary lender will have their own eligibility requirements, but most will ask for some or all of the following:

• A guarantee and/or personal guarantee from the business owner
• Low credit score – 620 or higher is good to have, but average lenders may accept lower scores
• Personal financial history of the owner
• Business financial history, and current cash flow or cash flow projections
• A specific area within the lenders service area
• A small amount of time in the business

SBA microloan rates, fees and payment terms.

Although the SBA imposes certain limits on average lenders, such as not exceeding $50,000 in loan amount, interest rates and fees are determined by your individual lender.

Interest rates will vary depending on your lender, but typically range between 8% and 13%. And payment terms are available for up to seven years.

SBA microloans also cannot be structured as a line of credit – a microloan is classified as a term loan.

Advantages and disadvantages of SBA microloans

Benefits

• It’s easy to qualify: If you are a startup or don’t have much of a business history, it can be difficult to qualify for a business loan. On the other hand, Microloans come with strict requirements, designed to provide financing to businesses that normally struggle to get funding.
• Quick funding: When applying for a traditional SBA loan, the application and funding process can take months to complete. In comparison, you can get financing for your small loan in as little as 30 days.
• Low interest rates: Like all SBA loans, microloans come with low interest rates. Rates will vary depending on your lender, but the average rate is between 8% and 13%.
• Flexible loan terms: SBA microloans come with repayment terms of up to 7 years, so your monthly payments are more affordable.

Evil

• Small loan amounts: If you need to borrow more than $50,000, a micro loan program may not be the best option for you.
• Spending limits: SBA microloans come with certain spending limits. For example, you cannot use the funds to pay off existing debt or buy real estate.
• Lenders may charge fees: The SBA caps its fees, but individual lenders may charge their fees. For example, you may have to pay an application fee, loan processing fee, or closing costs.
• Availability is limited to: Since SBA microloans are offered by nonprofit lenders, these loans can be difficult to obtain. These lenders do not have the resources and staff that larger lenders have, so these loans may not be available in your area.

Finding SBA Microloan lenders

The SBA has hundreds of lending partners located across the country, and offers an extensive list of small loan lenders to help you find a match.

Most lenders will require you to speak with a loan officer over the phone or apply in person.

The lender you work with will let you know about any necessary paperwork and documents to apply. In addition, some lenders may require you to complete a workshop or training program as part of the application process.

As part of your paperwork, you will need to provide a range of information, including:

• Proof of who you are
• Definition of collateral
• Balance sheet data (income and expenses)
• Personal and business tax records
• Business details (industry, licensing, assets, leases, etc.)

Once you have submitted all the required documents, your application is complete, and your lender will review and process the loan.

Alternatives to SBA microloans

If you’re not sure if an SBA microloan is right for your business, here are some options to consider:

• SBA 7(a) loan: SBA 7(a) loans are a good option for businesses that need large loan amounts. These loans are available for up to $5 million, but eligibility criteria are strict.
• Business credit cards: A business credit card can be used for any business purchase, and the application process is very simple. If you go this route, look for a card with an introductory 0% APR.
• Invoicing: If you have a lot of money tied up in your unpaid invoices, invoice financing allows you to use your remaining invoices to gain access to cash.