The Small Business Administration (SBA) offers a microloan program for small businesses and certain not-for-profit childcare centers. SBA microloans are targeted towards underserved businesses, such as startups, with the benefit of competitive interest rates.
You can get up to $50,000 on an SBA microloan, and funds can be used to help with startup expenses or costs associated with expanding your company. While funds are issued by the SBA, loans are issued through private lenders, which can each have their own set of rates, terms, and requirements.
A business loan broker like Lendio can help you find the right SBA lender and loan type for your circumstances. Lendio has a network of more than 75 different lenders and pairs you with a dedicated funding specialist to guide you through the loan process.
Allowable Uses for SBA Microloans
Proceeds from an SBA microloan can be used for a wide variety of business expenses. Funds can be used to help with expenses associated with getting your business started and to aid in the growth of your company. This can include costs involved with purchasing, repairing, or improving business-related items.
Common types of allowable uses include the following:
- Working capital, such as payroll expenses, inventory, or other daily costs
Prohibited uses for SBA microloans: Loan proceeds cannot be used to pay existing business debts or purchase real estate.
SBA Microloan Pros & Cons
SBA Microloan Rates & Terms
When it comes to interest rates and loan terms, the SBA sets limitations on certain items, leaving others up to individual lenders. Loan amounts, for instance, can vary by lender but have a set maximum of $50,000. Similarly, the SBA sets a maximum of six years for loan terms, but individual lenders may offer a shorter loan term.
While it may be challenging to determine the terms you’ll get without applying, you should at least determine if the minimum or maximum amounts possible for an SBA microloan will be sufficient for your needs before moving on to the next step. It’s also important to check that the rates and terms do not negatively impact your company’s cash flow.
If an SBA microloan is not right for you, we also have a guide discussing other types of SBA loans that could be better suited for your business.
Qualification Requirements for SBA Microloans
Many qualification requirements for an SBA microloan will vary among different lenders. As a result, you shouldn’t be discouraged if told you’re ineligible. In addition to the typical criteria listed above, here are some additional details to be aware of:
- Business type: To be eligible for an SBA microloan, you’ll need to be considered a for-profit company that meets the definition of a small business. You can use the SBA’s size standards tool to help in this determination. Certain not-for-profit childcare centers are also eligible.
- Credit score: Your personal and business credit scores may both be reviewed depending on the lender you choose. Exact requirements will vary among lenders, but we recommend having a personal credit score of at least 620. For business credit, many lenders look at the FICO Small Business Scoring Service. Here, a score of 160 or higher will give you good approval odds.
- Time in business: SBA microloans can have more flexible qualification requirements since they’re designed to help underserved businesses. As a result, companies with less than two years’ time in business should have an easier time getting approved, but business owners should be aware that lenders may require a significant amount of documentation for the company’s credit and finances.
- Annual revenue: Some lenders may require a minimum dollar amount for revenue, while others may only need your business to demonstrate profitability and positive cash flow.
- DSCR: DSCR measures your company’s ability to repay debt. It is one of several factors that can be used to determine the health of your business finances. You can calculate it by taking your annual net operating income and dividing it by your current year’s obligations. Alternatively, you can use our DSCR calculator.
- Personal guarantee: By agreeing to a personal guarantee, you will be held personally liable if your business is unable to pay its debts. A personal guarantee reduces a lender’s risk of issuing you a loan because it gives it an additional route to recoup any potential financial losses if you default.
- Collateral: Some lenders may require you to pledge collateral as a condition for getting a loan. Doing so gives the lender the right to take possession of the collateral in the event of a default.
Steps for Applying for an SBA Microloan
Step 1: Find a Lender
To get an SBA microloan, you must find an authorized intermediary lender that participates in the program. You can use the SBA’s list of participating lenders. Given the number of choices you may have, we’ve also provided some tips on how to choose a lender.
What To Consider When Choosing a Lender
The lender you select can have a large impact on your overall loan experience. It can affect whether you get funding, how long it will take, how much documentation is required, and what your experience will be once your loan is funded. Here are some additional items to consider in picking a lender:
- Rates and terms offered: The rates and terms offered by a lender will have a significant impact on your company’s credit and finances. As a result, you’ll want to ensure that you can afford the loan payments and that it will not adversely impact your cash flow.
- Flexibility of qualification requirements: In addition to a lender’s eligibility criteria, its ability and willingness to issue policy exceptions can help you get approved if you happen to fall short in one category but can demonstrate other compensating factors.
- Lender’s experience with SBA loans: Lenders that regularly deal with SBA loans can not only fund more quickly but may also be able to provide you with a more streamlined and stress-free approval process.
- Locations and ability to visit a physical branch: Some lenders have a larger physical footprint. If you prefer to conduct business at a physical branch, be sure to check its closest locations to you. Alternatively, if you prefer to conduct business online, you may want to ask about the capabilities of its online platform for things like uploading documents, getting customer support, and managing your account online.
- Hours of operation: A lender’s hours of operation can impact how quickly you receive service in the event that you have a question or concern about your account.
- Customer reviews and ratings: Seeing how a lender has been rated by current or former borrowers can give you insight into what type of experience you can expect.
- Other loans and services offered: If you prefer to have multiple services with the same lender, you can check to see if it offers any complementary products or services that can help your business. Some examples can include other types of loans and financial planning services.
Step 2: Complete an SBA Microloan Application & Prepare Required Documentation
Once you’ve found a lender, you’ll need to submit a formal SBA microloan application. Before you do this, you may want to check when the lender will conduct a hard pull of your credit or if you will be obligated to pay any application or origination fees if you decide not to accept a loan offer.
As part of the application process, lenders will commonly request a number of credit and financial documents. While this can vary based on the lender you choose, the loan terms you’re requesting, and the specific circumstances of your business, below is a list of commonly requested items. Preparing these ahead of time can expedite your loan approval:
- Personal and business tax returns (past three years)
- Business bank statements (past six to 12 months)
- Balance sheet
- Profit and loss (P&L) statements
- Business licenses and professional certifications
- Business plan
Step 3: Review & Accept Loan Terms
After you’ve applied and provided the lender with all of the documents it has requested, you’ll either be approved or denied for the loan. If approved, you should review all of the loan terms to ensure it’s what you’ve requested. At a minimum, we recommend double-checking the following items:
- Interest rate, including fixed vs. variable rates
- Minimum payment amounts
- Repayment term
- Payment due dates and applicable grace periods
- Loan fees, such as prepayment penalties or late fees
SBA Microloan Alternatives
SBA microloans are not an option for everyone. This can occur as a result of a lack of SBA-approved lenders. It can also occur if your business is unable to meet the qualification requirements of a particular lender, in which case we recommend you check out our tips for improving your approval odds in our guide on how to get a small business loan.
If you find yourself in these scenarios, here are some additional financing options you can consider:
- Personal loan for business purposes: If you are unable to get an SBA microloan as a result of your business credit or finances, you should consider a personal loan. Personal loans for business purposes place a larger emphasis on your personal credit rather than that of your company. Check out our top picks for personal loans.
- Small business credit card: Many small business credit cards have more flexible requirements when it comes to things like time in business, revenue, and business credit scores. This is especially true for those that require a personal guarantee. See our guide to the leading small business credit cards.
- Small business line of credit: Many small business line of credit providers can issue funding to newer companies, those with lower revenue figures, and businesses with bad credit. Head over to our list of the best small business line of credit providers.
Frequently Asked Questions (FAQs)
It’s recommended that you have a credit score of 620 or above to improve your approval odds. With that being said, the criteria can vary based on the lender you choose. As a result, it’s a good idea to check with multiple banks or lenders before making any final decisions.
SBA microloans tend to be easier to get compared to other types of SBA loans. This is because microloans are designed to help underserved businesses, such as startups. However, individual lenders can have varying eligibility requirements, so you may find that some lenders are stricter than others.
In general, it can take approximately 30 to 60 days to get an SBA microloan. This can vary depending on the lender you choose and the complexity and strength of your business credit and finances.
With an SBA microloan, you can get up to $50,000 in funding. Loan proceeds can be used to cover startup expenses or costs associated with a company’s growth plans. This type of loan is designed to help underserved businesses, such as startups and minority-owned companies, that might otherwise not be eligible for traditional types of loans.