SBA MicroLoan: A Complete Guide

As a small business entrepreneur, financing is essential if you plan to start a new project or expand your business venture. Though you may encounter numerous options to avail capital, being a start-up, you may not qualify for most of them. That’s when the SBA MicroLoan Program comes to the rescue!

SBA partners with various nonprofit organizations in the US to offer multiple benefits and Microloans to start-ups and small business ventures. Wondering if the SBA MicroLoan Program is the best choice for your venture? Peruse on to learn more!

What Is an SBA Microloan?

The SBA MicroLoan Program offers assistance to small business entrepreneurs, low-income individuals, women-owned ventures, and minority-owned start-ups. With this financing program, business entrepreneurs can borrow up to $50,000, with a repayment term of up to six years.

In the SBA MicroLoan Program, the federal government offers loans to specific nonprofit community-based ventures — who act as intermediary lenders, at a discounted rate. These intermediaries play an active role in lending out business loans to small businesses and start-up ventures. Start-ups use SBI Microloan for numerous purposes, such as purchasing supplies, machinery, furniture, fixtures, equipment, or working capital.

Due to its low-interest rates, this funding is ideal for businesses that need small capital with long repayment terms. Self-employed and even home-based start-ups can avail of these loans through this program. However, you cannot use this funding to purchase real estate or refinance your debt.

How Does SBA Microloans Work?

To obtain the SBA Microloan startup fund, businesses will have to work directly with the community-based or non-profit organizations that serve as the microlenders. These intermediaries have to meet SBA’s minimum requirements to obtain this loan and mostly require collateral if any. However, the borrowers may not have any collateral to avail of the loan.

As for this microloan’s standing operating procedures, it encourages the intermediaries to be creative while accepting the collateral for the loan offered. The Microlenders can, in turn, offer technical assistance free of cost to enable start-ups to attain success.

Using this program, borrowers can apply for a loan up to $50,000 through a microlender. In this program, borrowers can get loans of $14,000 to $15,000 on average. The minimum amount a business entrepreneur can apply for is $500.

The best part about SBA MicroLoan compared with the other funding options is that — SBA takes a backseat when it comes to setting any terms and costs. The only criteria set by the SBA is the borrowing cap of $50,000. The rest of the details, such as qualification requirements, rates, and loan terms, are set by the intermediaries. The Small Business Administration does not review even the loan applications for creditworthiness. Due to how it functions, SBA microloans are also known as SBA start-up loans.

The Benefits of SBA Microloans

SBA Microloan is an affordable capital source for start-up entrepreneurs and self-employed owners who have tried multiple times and failed to acquire loans from other funding options. Small business owners usually find it hard to acquire small loan amounts from traditional financing institutions. Here are some of the benefits they offer.

  • Loan repayment terms:

Start-up ventures usually require short term loans to get their business running. More often, you will be faced with the challenge of having to repay the loan within a few months. When it comes to an SBA MicroLoan, it has a repayment term that extends up to 6 years — where the monthly payments are quite affordable for small businesses.

  • Eligibility criteria:

This funding program is eligible for both start-up organizations as well as established companies. It’s an incredible option for business owners who have a limited credit history — as they might be new to starting a business in a country. This funding program is also available for freelancers, sole proprietorships, and ventures with zero or few employees.

If you find it hard to get loans from traditional lenders, getting approval for SBA Microloan stands a better chance.

  • Interest Rates:

Most business loans offered by traditional lenders have huge interest rates and high fees. When it comes to the SBA Microloans, the average interest rate for the financial year 2020 was 6.5%. Additionally, borrowers can negotiate the rates with the Microlenders, and the interest rates normally range between 6% to 9%.

  • Application procedure:

The specially designated Micro Lenders offer loans to the applicants and assist them with the application procedure. As most of these borrowers have encountered some bad experiences in the past while trying to obtain funds, these intermediaries offer the best services available. Also, they make sure that you receive the SBA Microloan startup funds to get your business running.

What Are The Eligibility Requirements For SBA Microloans?

Although SBA does not review creditworthiness applications, they do have certain basic parameters to be fulfilled by the start-ups to meet the loan eligibility requirements. In addition to these criteria, the Microlenders will also have their own SBA micro loan qualifications requirements. The requirements vary for different microlenders. Some request for the business’s credit score and also of the owner, the age of the business, and so on, whereas some don’t.

When it comes to the SBA microloan qualifications, borrowers need to meet the following requirements.

  • Venture experience:

SBA microloan program is best suited for self-employed and home-based ventures that require small loan amounts. Nonprofit childcare centers are also eligible for these microloans. All start-up organizations and small business ventures qualify to apply for the SBA Microloan program.

When it comes to organizations that require huge funding amounts that go up to $5 million, must opt for the other SBA funding options. Additionally, it is a must for all businesses that avail of this loan to have an industry experience of a minimum of two years.

  • Average credit score:

The requirements for the creditworthiness of the borrower keeps varying based on the microlender. Most intermediaries do not need an excellent credit score for availing of the loan. On average, borrowers need to have a credit score that ranges between 550 to 675 when applying for the SBI Microloans. Since most of the intermediaries are flexible when it comes to creditworthiness, borrowers can talk with the lenders to acquire more specific details.

Certain aspects like foreclosures or bankruptcies can make the SBA micro loan qualifications quite challenging. If your creditworthiness happens to be very low, you can get a cosigner with adequate income and credit to repay the loan, if needed.

  • Loan repayment ability:

Ultimately, the micro Lenders are more concerned about whether you will repay the loan. To prove your repayment ability, you can either show your organization’s existing cash flow or your financial projections if your start-up venture hasn’t generated any profits yet.

Additionally, you must submit your business plan to avail of the SBA Microloan startup funding. To stand a better chance of receiving the SBA loan, it’s advisable to create a solid and professional business plan, clean your credit score, and be prepared with your personal guarantee or collateral.

  • Collateral guarantee:

Generally, the SBA Microloans require some sort of collateral to guarantee that they will get their money back in case of any default. However, this requirement lies at the discretion of the non-profit Microlenders.

Personal assets such as houses, cars, personal property, and business assets such as accounts receivables, machinery, equipment, and real estate may be required as collateral.

Additionally, a business entrepreneurs’ guarantee with a 20% stake in their business is essential for acquiring the loan.

Lastly, the borrower must be a law-abiding permanent resident or a non-citizen in the US that holds a work permit.

SBA Microloan Rates

The rates for the SBA microloans keep varying based on the microlender you choose. Here’s why? SBA takes a backseat when it comes to setting the loan standards. Most non-profit microlenders have set an average rate that offers your insight into the amount you need to repay for the loan taken.

SBA offers entrepreneurs a maximum borrowing amount of $50,000 with an average interest rate between 8%-13%. Certain MicroLoan intermediaries offer funding options as low as $500. Based on the borrower’s business experience and purpose of using the loan, they will have to pay a down payment for acquiring the SBA MicroLoan.

Though it’s not always necessary, start-ups need to pay an average of 20% as a down payment. When it comes to business acquisitions, the down payment is only 10%. In most cases, funding is available with zero down payment — if all the other necessary criteria are met.

The maximum repayment term length that SBA offers for this microloan is up to six years. The loan repayment frequency offers you the flexibility to make monthly payments — that are affordable for most business owners.

Final Thoughts

Though the SBA MicroLoan program offers an incredible opportunity for most small business ventures and start-ups, it may not always be the perfect option for your organization. However, if it happens to be the right choice for your business, you will be able to avail of the loan that’ll help you fund and grow your business ahead.

With this small amount of capital, you will be able to get your business running in the right direction soon!

ALSO READ: Complete Manual on Government Small Business Loans For Women