SBA Microloans Explained: What They Are, Requirements, and How To Apply

Small business owners seeking lower levels of financing may want to consider the SBA microloan program. Borrowers may use these small loans to supplement working capital or to buy furniture, machinery, and equipment.

The SBA does not issue microloans directly. Instead, the agency selects intermediary lenders to administer the program. These lenders set their own eligibility requirements and often ask borrowers to provide some collateral and a personal guarantee.

What Is a Microloan?

A microloan, by definition, is a small loan to fund entrepreneurial projects. SBA microloans are government-backed small loans designed to help businesses that may not qualify for traditional bank financing.

The SBA program provides microloans for startup businesses, as well as existing small businesses. These small business loans of up to $50,000 are also available to certain nonprofit child care centers. The U.S. Small Business Administration reports that the average SBA microloan amount is $13,000.

These loans come through intermediary lenders — nonprofit, community-based groups that provide both financing and management support.

Some microloans are designated specifically for women, minorities, veterans, low-income individuals, and other underrepresented groups of business owners. However, the program has available funds for all for-profit small businesses.

How To Use a Small Business Administration Microloan

Small businesses can use SBA microloans for a variety of purposes. The microloans SBA offers give businesses financial flexibility when they need low-level funding to rebuild, reopen, repair, upgrade, or strengthen their operations.

Businesses can use funds from the SBA microloan program for:

• Working capital
• Inventory
• Supplies
• Furniture
• Fixtures
• Machinery
• Equipment

The program does restrict certain uses, though. You won't be able to use proceeds from an SBA microloan for existing debt payments or real estate purchases.

What's the Difference Between an SBA Microloan and an SBA 7(a) Loan?

The SBA microloan program and SBA 7(a) program target different financing scenarios. SBA microloans cap at $50,000 with a maximum term for repayment of up to six years, while SBA 7(a) loans offer much larger amounts — up to $5 million — with repayment stretching as long as 25 years. Like SBA microloans, SBA oversees the 7(a) loan program but doesn't supply the actual funds. Instead, 7(a) loans are available through banks and SBA-approved lenders.

While SBA Microloans and 7(a) loans are among the most common options, there are also other programs tailored to specific needs including 504 loans, Export finance programs, and the 7(a) Working Capital Pilot (WCP) program.

Pros and Cons of SBA Microloans

SBA microloans come with distinct pros and cons worth evaluating. For businesses facing barriers to traditional lending, the microloans SBA distributes serve as a viable alternative when traditional lenders say no. Borrowers will have fewer qualification criteria with the Small Business Administration microloan program compared to most standard business loan products.

SBA Microloan Requirements and Eligibility

SBA and individual lenders share responsibility for setting microloan eligibility standards. Lenders typically use more relaxed credit standards than they do for other business loan programs. The section below outlines the specific requirements for microloan qualification.

For-Profit Small Business

To qualify for a microloan, the applicant must meet the definition of a for-profit small business. Currently, the only exception is for nonprofit child care centers, which are also included in this program.

Average Credit History

While you don't need perfect credit to obtain a microloan, most lenders will require at least some credit history. Certain events, such as a past bankruptcy or foreclosure can make it more difficult to qualify. If you have a lower credit score, you'll have the ability to highlight strengths in other areas of your business profile when you apply.

Ability To Repay the Microloan

As part of the approval process, lenders may want you to demonstrate your ability to repay the loan. Providing support in the form of a cash flow statement or detailed financial projections is part of how to get an SBA microloan.

Business Plan

Lenders may also require applicants to submit a business plan. For companies just starting out, a formal business plan shows lenders that you have a clear purpose and a solid strategy for achieving profitability. This document can help offset the limited revenue generation that is common among newer companies.

Collateral and Personal Guarantee

Microloans will require that the borrower sign a personal guarantee. If your business defaults, the lender may be able to recoup its funds from your personal assets. You should expect to provide collateral for your microloan. Collateral can come from business or personal assets, such as business equipment, real estate, your car, or some other form of personal property.

Good Character

In order to obtain an SBA microloan, you must also be able to demonstrate "good character." Generally, this means that you should not have a criminal record. Careful attention is paid to the crimes of fraud, burglary, or theft. While a past record will not necessarily prevent you from getting approved, it could make approval more challenging.

Minimum Amount of Time in Business

SBA microloan requirements don't specify a minimum amount of time in business, making this financing option accessible to new and seasoned ventures. However, individual lenders may set their own SBA microloan qualification and operating requirements. Business owners should contact their local approved intermediary lender to understand specific SBA microloan eligibility criteria.

Nearby Location to Lender's Service Area

To meet SBA microloan qualifications, your business must operate within the geographic service area of the lender you're working with. Different intermediary lenders cover different service areas. If one lender doesn't serve your area, other microloan providers might, so it's worth checking out multiple lenders to find one that covers your region.

SBA Microloan Amount, Terms, and Interest Rates

SBA funds the microloan program at a significant discount, making costs and terms more accessible to small business borrowers. If approved, you can expect the following:

• Amount: The program sets a maximum loan amount of $50,000 with no minimum requirement. According to current SBA data, the average microloan is approximately $13,000.
• Terms: SBA microloan terms for repayment cannot exceed six years.
• Interest Rates: SBA microloan interest rates vary depending on the lender. Rates typically fall between 8% and 13%, with the average fluctuating based on market conditions.
• Fees: Intermediaries may charge fees up to 3% of the loan amount, plus additional closing costs that vary by lender.

How To Apply for an SBA Microloan

The Small Business Administration microloan application process is similar to other business loans, but you'll need to work with an approved lender. Here's how to apply for the SBA microloan program:

1. Find a lender. Use the SBA's intermediary search tool to locate an approved microlender in your area.
2. Gather appropriate documents. Collect necessary documentation including a business plan, personal and business tax returns, financial statements, profit and loss statements, cash flow projections, and references.
3. Submit an application. Complete the lender's SBA microloan application. Your lender can walk you through the application steps and answer any concerns you have.
4. Receive funds. Upon approval, lenders will disburse the funds to the borrower.

How To Find SBA Microloan Lenders

Small businesses should not go directly to SBA to request a microloan. Funds are provided directly to intermediary lenders who administer the loans. These SBA microloan lenders are nonprofit community-based organizations with experience in microloan lending.

SBA's intermediary search tool helps you find approved microloan lenders. Compare several lenders before applying, as each intermediary sets its own specific requirements and terms within the SBA microloan program guidelines. This research ensures you find a lender that matches your business needs and serves your location.

SBA Loan Alternatives

Business owners who may not qualify for SBA microloans or need different financing structures can explore business loans and other funding options. Consider these alternatives to the Small Business Administration microloan program based on your specific circumstances:

• Business Credit Cards: Quick access to revolving credit for smaller purchases and cash flow needs.
• Conventional Business Loans: Secure larger loan amounts through traditional banks, provided you meet their stricter lending standards.
• Business Grants: Debt-free funding that doesn't require repayment, though competition can be intense.
• Invoice Factoring: Convert outstanding invoices into immediate cash by selling them to a third party at a reduced rate.
• Peer-to-Peer Lending: Connect with individual investors through digital lending marketplaces.
• Equipment Financing: Finance machinery and equipment purchases using the assets themselves as loan collateral.
• Merchant Cash Advances: Receive up front capital in exchange for a portion of future card sales, though costs run higher.

Is an SBA Microloan Right for Your Business?

The SBA microloan program is a financing alternative that may appeal to small businesses in need of a lower amount of funding. However, microloans aren't suitable for every business situation. Before pursuing an SBA microloan, evaluate your funding needs, review your credit profile, and research approved intermediary lenders in your area.