Looking for a small injection of capital to start, reopen, or expand your business?

If you’ve exhausted other conventional funding sources, an SBA microloan could give you the boost you need.

What Are SBA Loans?

SBA microloans are often a good option for entrepreneurs with a solid business plan but limited capacity and collateral.

The United States Small Business Administration is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) and other community-based entities to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

Reasons to Consider an SBA Loan

SBA loans can offer small businesses several key advantages, including:

• Competitive rates: Because they’re a lower risk for lenders, SBA loans often feature lower interest rates.
• Lower fees: SBA loans may involve an upfront and/or yearly service fee, but these are generally nominal.
• Longer terms: Maximum maturities range from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate).
• More flexibility: Loan amounts range from $500 to $5.5 million, depending on your needs and capacities.
• Continued support: The SBA and its local partners offer free and low-cost business training and counseling.

What Is the SBA Microloan Program?

These smaller-size loans can help small businesses start up and grow. They’re often a good option for entrepreneurs with a solid business plan but limited capacity and collateral.

Unlike most other SBA loans, microloans aren’t provided through partnering financial institutions. Instead, the SBA pays out funds to specially designated nonprofits with experience in small-business lending, marketing, and technical assistance – and those intermediaries make loans to eligible small businesses in their catchment areas.

The maximum microloan amount is $50,000, with a minimum of $500 and an average of around $17,000. Term lengths vary but are capped at six years per SBA regulations. Commonly, microloans require some type of collateral and a personal guarantee.

Am I Eligible?         

Microloans are designed to help small-business owners who might have difficulty qualifying for a traditional loan. That includes (but isn’t limited to) women, minority, and veteran entrepreneurs.

Specific eligibility requirements can vary by microlender. For instance, the SBA doesn’t designate a minimum credit score or length of time in business, but individual microlenders can and do set their own rules. In nearly all cases, though, your business needs to:

• Physically operate as a for-profit company (or not-for-profit childcare center) in the U.S. or its territories
• Pursue a sound business plan in an eligible industry (e.g., excluding lending and gambling)
• Meet SBA size standards (which depend on your industry and annual revenue)
• Show owner equity (time and money you’ve invested in the business)
• Be in good standing on all existing government debts
• Demonstrate a need for funds and the ability to repay them from projected business cash flow

How Can I Use It?

SBA microloans can be used for a variety of purposes, including:

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

However, unlike more general business loans – like the SBA Standard 7(a) loan – SBA microloans can’t be used for real estate purchases or leasehold improvements. They also can’t be used to pay existing debts.

How Do I Apply?

You should find and contact an SBA-approved intermediary in your area to get the application process started. Here are some of the documents you may need to provide:

• Profit and loss statements (current within 180 days)
• Projected financial statements (one year)
• Ownership and affiliations
• Business license or certificate
• Loan application history
• Income tax returns (three years)
• Resume
• Business overview and history
• Business lease

Ask your microlender for a complete checklist of required documents. Once you’ve finished your application, your microlender will submit it to the SBA for approval, close the loan, and disburse the funds. The whole process varies quite a bit, but generally takes between 30 and 60 days.

How Do I Pay It Back?

As with eligibility requirements and application processes, repayment terms for SBA microloans can vary by microlender. Normally, they’re structured as term loans with a fixed rate that’s capped by the SBA. That means you’ll pay a set amount every month until the end of the term, much like a standard residential mortgage or auto loan.

As an SBA microborrower, you won’t pay any general fees. You may be asked to pay reasonable out-of-pocket closing costs and/or a small annual contribution. Late fees may also apply.

What Are My Other Options?

There are several other types of SBA loans you may want to consider, including:

• 7(a) loans, which are the most popular SBA loans and can be used for a wide range of purposes
• 504 loans, which can be used for long-term fixed assets like real estate and major equipment
• Express loans, which feature an accelerated turnaround time and have special options for exporters
• Disaster loans, which help businesses overcome economic injury or damage in the wake of a declared disaster

Your financial institution can also help you to investigate non-SBA loan products and weigh the pros and cons of each.

Take the First Step Today

To explore all your small-business financing options, including SBA microloans, consult your financial institution.

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