Before you dive in:
- Take your time - Things that need growth take time
- Breath - Persevere and you will get there
- Be Bold - Seek and Demand Guidance - The SBA offers great resources.
How Does An SBA Microloan Work?
The SBA
sets guidelines for SBA loans and microloans, though lenders have some leeway when it comes
to setting things like interest rates and eligibility requirements.
General
loan terms include:
- Maximum
amount: $50,000 (average is about $14,000)
- Maximum
term: Six years (average is 40 months)
- Interest
rate: Cost of funds + 7.75% for loans over $10,000, cost of funds + 8.5% for
loans under $10,000
- Cost of funds is based on market rates using the rate of 5 Year Treasury Bills
Before
applying for a microloan, borrowers must certify that they’ve tried to secure
private financing, such as from a bank or other lender.
How Do I Qualify For An SBA Microloan?
SBA microloans are designed for startups and small businesses that need money to either begin operations or expand their business. You will need to fulfil the SBA loan application process. The SBA’s partner lenders have some freedom when it comes to determining things like credit requirements but there are some general rules borrowers must meet.
- Loans are
only available to for-profit businesses
- The
business must be within the lender’s approved area
- Owners must
attempt to get private financing before applying for a microloan
- Prove
income sufficient to repay the loan
- Have
average credit history (applicants with no credit may still be eligible)
- No recent
bankruptcies
- Provide
collateral and a personal guarantee of repayment
- Show a
reasonable business plan
- Neither the
business nor owner may be barred from receiving federal funds
- No owners
over 50% or more of the business may be 60+ days late on child support payments
Keep in mind that both you and your business are important when applying for an SBA microloan. You have to provide a personal guarantee that you’ll cover the loan if your business fails. That makes your personal credit as important as your company’s credit.
Who Are SBA Microloans Recommended For?
Microloans
are designed for specific types of businesses. In general, they’re best for
brand new or very small companies that need funding.
A typical
borrower for an SBA microloan:
- Needs to
borrow $50,000 or less
- Has good
credit
- Has a good
business plan that it can show to potential lenders
- Already has
positive (or at least break-even) cash flow
- Produces a
solid revenue ($120,000 or more)
- Has a
physical location and is not based at the owner’s home
- Has two or
more employees
While most
businesses that receive a microloan are like the above, that does not mean that
all recipients are the same. Some are startups that are just beginning operations.
Others have owners with poor credit or no credit history at all. Others are
purely owner-operated.
How To Get n SBA Microloan?
If you’re
interested in applying for an SBA microloan, the first thing that you need to
do is find an SBA intermediary microlender in your area.
The SBA
does not offer loans directly. Instead, it lends money to local nonprofits and
community organizations and relies on those organizations to make loans on its
behalf.
Once you’ve
found a microlender that you’d like to work with, it’s time to submit an
application. Each microlender has its own process and specific loan
requirements, so make sure to work closely with the lender while applying. You may also wish to look into how long it takes to get an SBA loan.
Most
lenders will ask for the following documents when you apply.
- Business
plan
- Business
and personal tax returns
- Balance
sheets and profit and loss statements
- Financial
projections or budget
- Resumes of
business owners
- Personal
financial statements
- Personal
credit report
- Articles of
incorporation
- Applicable
business licenses and permits
- List of
current business assets
Once the
lender receives your application, it will review the information that you
provided and make a lending decision. The full length of time from starting
your application to receiving funds can be as long as 120 days.
What Can I Use An SBA Microloan For?
One of the
benefits of using an SBA microloan is that they’re highly flexible. You can use
them for many different purposes, including:
- Working
capital: SBA microloan funds can serve as an additional cash cushion that you
can use for different needs that arise.
- Equipment
purchase: You can use funds to buy equipment that can help improve your business’
efficiency or output.
- Inventory:
If you want to grow your company or add a new product line, SBA funds can help
you expand your company’s inventory.
- Supplies:
SBA microloans can fund the purchase of raw materials and other supplies that
you need to keep your company running.
- Machinery: You can use loans to purchase manufacturing equipment or other machinery that is essential to your company.
- Technology improvements: New computers, payment systems, and other technologies can help your company run smoothly.
-
Leasehold improvements: You can use SBA microloan funds to customize your rented office or storefront to make your business more efficient or inviting to customers.
Pros And Cons Of Using An SBA Microloan
Before
applying for an SBA microloan, consider all of the advantages and drawbacks.
Pros
- Startups
and established businesses eligible: Whether you’re just getting started or
have been around for years, your company can use a microloan to get funding.
- Opportunity
for underprivileged/underserved entrepreneurs: The SBA partners with local
community groups to make loans, which means they’re often made available
directly to traditionally underserved communities.
- Available
to borrowers with limited credit: You can qualify for a loan even if you don’t
have a long credit history.
- Available
to solopreneurs and freelancers: While many borrowers have strong revenue and
multiple employees, you can apply as a freelancer or a business of one.
- Low rates
and long repayment terms: You can keep your monthly loan costs low by extending
the loan term and keeping interest rates low.
Cons
- Limited
loan amounts: SBA microloans only offer up to $50,000
- May not be
available to borrowers with bad credit: While you can qualify with a thin file,
having bad credit may make it hard to get a loan.
- Collateral
and/or personal guarantee required: You may need to offer something of value to
secure the loan or a personal guarantee to cover the loan out of your own
savings if your business can’t make payments.
- Long application process: It can take months from the time you apply to the time you get the money you need, making it a poor choice for businesses that need quick cash.
Not Eligible For SBA Microloans? Try These Funding Alternatives
If your small
business needs to borrow money but isn’t eligible for a microloan or finds that
a microloan won’t fit its needs, consider these alternatives.
- Invoice
financing: If you often find yourself waiting on payments from your customers,
invoice financing is a low-cost way to improve cash flow. Lenders lend you
money based on your unpaid invoices. When you get paid by your customers, you
send the funds to the lender to cover the loan.
- Business line of credit: A business line of credit gives you on-demand access to funds
when you need them. You only pay interest on the amount that you borrow but can
borrow cash quickly and easily.
- Business credit cards: Business credit cards let you make purchases without paying for
things upfront. They’re ideal for short-term financing when you need to buy
supplies.
- Business loans from online lenders: For larger projects and investments, a business loan
can help you get the money you need. Online lenders are often the best to work
with because they keep costs low. Check out our list of online business lenders
for more info.
- SBA 7(a) loan: 7(a) loans are a different type of loan offered by the SBA. These loans
can be as large as $5 million, making them ideal for larger businesses with a
need for significant capital.
Conclusion
SBA
microloans are designed to help small businesses get the funding they need to
grow. Before you apply, gather all of the documents your lender might need and
be prepared to wait a few months while the lender funds your loan.
If you need
less than $50,000, SBA microloans can be a good choice, especially if you don’t
have a long credit history. If you have an eligible business, you should apply.