SBA Microloans: How to Apply and Eligibility Requirements

by Kieran Daly
March 14, 2023
SBA Microloans: How to Apply and Eligibility Requirements

SBA microloans are one way for a startup to get working capital to expand, start, or grow their business. These loans are generally managed by intermediary lenders who work with the Small Business Administration (SBA) to provide affordable financing options to small business owners.

There are several advantages to getting an SBA microloan. For one, they often have low interest rates, flexible repayment terms, and access to technical assistance and training. However, applying for an SBA microloan can be a complex and time-consuming process, and it's essential to understand the requirements and qualifications before starting your application.

Before applying for a microloan, make sure you understand how SBA microloans work, including eligibility requirements and application procedures. Whether you're an entrepreneur or an established small business owner, this article will help you navigate the SBA microloan process and secure the funding you need to take your business to the next level.

What Is an SBA Microloan?

An SBA microloan is a type of loan under $50,000 backed by the U.S. Small Business Administration. In most cases, the average loan size is under $13,000. The SBA microloan program is one of the most affordable small business loans available for entrepreneurs as well as startups in underserved communities. 

Microloans are smaller SBA loans provided by the government agency but managed by nonprofit community-based organizations. The intermediary lenders are the ones who take care of the application process. They also distribute the loan and manage the repayment terms. The lenders can also set their own interest rates and eligibility requirements, so fees and other loan terms can vary by the nonprofit organization. 

In other words, the SBA funds the loan but doesn’t do any of the heavy lifting. They do, however, provide a set of guidelines for the lenders to follow, including setting a maximum rate on fees and limiting the loan term to six years.

SBA Microloans at a Glance

SBA microloans have different eligibility requirements depending on the lender, but in general, the program has similar rates and conditions, such as: 

  • Term lengths of up to six years (72 months)

  • Loan amounts up to $50,000

  • Interest rates generally between 8% and 13%

  • Must be in business for two years, have collateral as well as a personal guarantee, among other requirements

Who Can Get a Microloan?

Microloans are for small businesses that meet the intermediary lender’s requirements. They are considered short-term loans, as the repayment terms cannot exceed six years. Interest rates for microloans vary by SBA lender but are usually more competitive than at a traditional bank.

The SBA doesn’t check the credit history of small business owners who apply for microloans, so it’s a great option for those with a low credit score. 

However, that doesn’t mean there aren’t other requirements that borrowers should be aware of before submitting a loan application. In most cases, you’ll need to provide tangible collateral that can be forfeited if you can’t repay the loan and you may also need to have a co-signer on the loan.

What Can You Use an SBA Microloan For?

Microloans can be used for several things to help your small business expand. Eligible borrowers can use the loans for business financing, including working capital, to buy inventory, supplies, furniture, equipment, machinery, and other materials you might need to rebuild, expand, or improve your small business. 

SBA microloans cannot be used to pay off existing debt or to purchase real estate. If you’re looking for a loan to either pay off debt or buy property for your business, you might want to consider other SBA loan programs, such as an SBA 504 loan or an SBA 7(a) loan.

How to Get an SBA Microloan

Getting an SBA loan can be time-consuming, and microloans are no different, although they are more accessible than other types of SBA loans. Here are the main requirements to apply for an SBA microloan:

  • Be a for-profit company: In most cases, to qualify for an SBA microloan, you need to have a for-profit business that has been in operation for at least two years. Some nonprofit child care centers are also eligible to apply. 

  • Be able to repay the loan: An SBA lender will want to know that you can pay back the SBA loan. You’ll need to submit a business plan as well as any cash flow statements or expected financial projections. 

  • Collateral and personal guarantee: Since many SBA microloan lenders don’t require a high credit score, you will need to provide collateral, such as business assets — like real estate, equipment, or accounts receivable — or personal assets like your car or home. You’ll also need to have a personal guarantee who will sign onto the loan. 

  • Provide tax returns and pay stubs: You’ll need to provide your personal tax returns and those of your business. In addition, you’ll be asked for recent pay stubs to ensure you meet the loan requirements. 

  • Submit business licenses and permits: Existing businesses may also be asked to provide any licenses or permits required to operate, a list of current business assets, and any current leases and contracts.

Keep in mind that some microlenders will have other additional requirements, so be sure to check out the SBA list of intermediary lenders before you apply.

What Are the Benefits and Downsides of an SBA Microloan? 

There are several benefits of getting an SBA microloan. Both startups and established companies are eligible to apply, and you can get smaller loan amounts. Because there is not as much emphasis on credit scores, it’s a great option for those with a lower credit score. In addition, SBA microloans are often available to those who might not otherwise be able to get loans from traditional financial institutions. 

However, microloans can’t be used for everything. If you are looking to consolidate your debt or purchase real estate, you’ll need to apply for a different type of loan. In addition, you’re limited to only borrowing up to $50,000. The SBA microloan process is also time-consuming and can take several weeks to get approval. And you’ll need to provide collateral and have a cosigner to be eligible for most SBA microloans.

Build your small business with financing

SBA microloans are one way you can get financing to expand your small business or startup. Still, you’ll need to meet the eligibility requirements and follow the application procedures. The SBA does not lend money directly to small businesses; instead, it works with a network of intermediary lenders who provide the loans. This means there may be additional requirements depending on the lender. 

An SBA microloan can provide several advantages to small business owners, including low-interest rates, flexible repayment terms, and access to technical assistance and training. Microloans are typically used for working capital, inventory, equipment, and other short-term needs. However, there are also some drawbacks to consider, such as the relatively small loan amount, strict eligibility requirements, and the requirement for collateral or a personal guarantee. 

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