The SBA Microloan Program Gives Small Businesses a Funding Alternative
Small business owners seeking lower levels of financing may want to consider the SBA microloan program. Microloans are available in amounts up to $50,000, but the Congressional Research Service reported that the average microloan issued in 2020 was $14,434, carrying a 6.5% interest rate. These small loans may be used to supplement working capital, or to purchase furniture, machinery, and equipment. They cannot be used to pay off other debt or to purchase real estate.
The SBA does not issue microloans directly. Intermediary lenders are selected to administer the program. These lenders set their own eligibility requirements and will often ask borrowers to provide some collateral and a personal guarantee.
What is a Microloan?
The SBA program funds small business loans of up to $50,000, available to eligible startups and existing small businesses. These loans are also available to non-profit child care centers. Many of the microloans are designated specifically for women, minorities, veterans, low-income, and other underrepresented groups of business owners. However, there is availability in the program for all for-profit small businesses.
SBA Microloan Lenders
Small businesses should not go directly to the 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 Microloan Eligibility Requirements
Eligibility standards for microloans are set by both the SBA and the individual lenders. Credit standards are generally more relaxed compared to other business loan programs. Specific requirements for microloan qualification are described below.
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 non-profit childcare 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. When you apply, you'll have the ability to highlight strengths in other areas of your business profile to make up for a lower credit score.
Ability to Repay the Microloan
As part of the approval process, lenders will want you to demonstrate that you have the ability to repay the loan. Support can be provided in the form of a cash flows statement or detailed financial projections.
Applicants are also asked to submit a business plan. For companies just starting out, a formal business plan shows lenders that you have a purpose in mind and a solid strategy for achieving profitability. This plan can help to balance out the minimal 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 on the loan, the lender may be able to recoup their funds from personal assets. You should expect to provide collateral for your microloan. The collateral may be offered in several forms, including business or personal assets. This could be business equipment, real estate, your car, or some other form of personal property.
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.
SBA Microloan Amount, Terms, and Interest Rates
SBA funds the microloan program at a significant discount, so costs and terms are more reasonable to small business borrowers. If approved, you can expect the following:
- Amount: Loan amounts range from $500 to $50,000, with an average loan size of about $14,000 - $15,000.
- Terms: Repayment terms cannot exceed six years.
- Interest Rates: Interest varies depending on the lender. The average rate in 2020 was 6.5%, but the SBA reports a higher range, between 8 and 13 percent.
How to Apply for an SBA Microloan
The application process is similar to other business loans, but you'll need to work with an approved lender. You can find a lender in your state using the SBA's intermediary search tool. The participating lenders will be able to walk you through the application process and answer any of your questions.
The SBA microloan program is a financing alternative that may appeal to small businesses in need of a lower amount of funding, for a purpose that conforms to the program's guidelines. If you're interested in pursuing this type of loan, you can reach out to an intermediary lender and request an application.