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Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management.
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SBA microloans are small loans of up to $50,000 that are funded by the U.S. Small Business Administration. These loans are often directed toward underserved communities, such as women and veteran business owners.
These loans have an advantage over other types of SBA loans because they often have less strict eligibility requirements. As a result, you may get approved for an SBA microloan even with minimal or no credit history. But a downside is that approval times generally range from one to three months.
The SBA microloan program provides small loans to startups and new businesses. Qualified small business owners can borrow up to $50,000. The average microloan is $13,000, according to the SBA. Interest rates typically range from 8 percent to 13 percent.
Although the SBA guarantees these loans, it doesn’t fund them. Instead, nonprofit community-based lenders fund the loans with SBA approval.
SBA microloans are often secured, requiring you to pledge collateral like unpaid invoices or inventory. In addition, most lenders require a personal guarantee, which means they can hold you personally liable if you default on the loan.
| Repayment terms | Up to six years |
| Interest rates | Varies by microlender, but typically from 8%-13% |
| Loan amount | Up to $50,000 |
| Fees | Lenders may charge borrowers packaging fees of up to 3% of the loan amount for loans of one year or more and 2% for loans with terms of less than one year. |
You can use an SBA microloan to pay for most business expenses totaling less than $50,000. It’s meant to boost working capital for expenses like expanding your product line, buying or repairing equipment, furnishing an office or paying suppliers. But the SBA doesn’t allow you to use funds to pay for real estate or to pay off existing debt.
SBA microloans may come in handy for small business expenses, but if you need to borrow more than $50,000, an SBA 7(a) loan is a better option. With this loan program, you can borrow up to $5 million. Plus, unlike with an SBA microloan, you can use an SBA 7(a) loan to buy real estate for your business.
While an SBA microloan works best for someone looking to start up or new businesses, an SBA 7 (a) loan works best for a more established small business with a history of earning profits.
If your business needs more than $50,000 in funding but doesn’t have an ideal business or financial profile, you can look into SBA 7(a) loans through certified Small Business Lending Companies (SBLCs). These loans are designed for businesses in disadvantaged communities.
| SBA microloan | SBA 7(a) loan | SBA 7(a) loan through SBLCs | |
|---|---|---|---|
| Administered by | Nonprofit community-based lenders | Banks and online lenders | Non-profit community-based lenders |
| Repayment terms | Up to six years | Up to 10 years for working capital and equipment loans; up to 25 years for real estate loans | Up to 10 years for working capital and equipment loans; up to 25 years for real estate loans |
| Interest rates | Varies by lender; typically 8% to 13% | Varies by lender | Varies by lender |
| Loan amount | Up to $50,000 | Up to $5 million | Up to $350,000 |
Over $26 billion in SBA 7(a) loan funds have been approved so far in 2024, according to the SBA 7(a) & 504 Summary Report. Most SBA funds go to states that are heavily populated, including California, Texas and Florida.
SBA loans are designed to help startups, newly founded businesses and certain not-for-profit childcare centers. Also, some intermediaries focus on members of underserved communities, such as minority-owned and women-owned business owners and people who live in low-to-moderate income areas.
According to an SBA press release, almost 5,500 small businesses received microloans in 2023, totaling $87 million in funding. Of those, 50 percent were from underserved communities such as Hispanic- and Black-owned businesses.
Beyond that, each lender has its own business loan requirements, which may include:
If you have been denied an SBA loan in the past, you can reapply after a 90-day waiting period.
While the SBA loan application process varies by lender, below are some general steps you take to apply for an SBA microloan:
The first step is finding an SBA-approved lender in your area. You can find one by reviewing this list of approved lenders.
Although application requirements vary, you’ll most likely have to provide some or all of the following documents:
Once you’ve chosen an approved lender in your area that best matches your business needs, submit a loan application.
After you’ve submitted your loan application, you’ll have to wait to see if you’re approved. Though approval times vary, it often takes one to three months for a microlender to notify you of its decision.
If approved, you might have to wait for the funds to be deposited into your bank account. Repay the loan as promised to avoid late fees and possible damage to your personal or business credit.
Not every business will qualify for an SBA microloan or can wait for SBA approval to get funding. If the SBA loan isn’t the right fit, your business has other options:
An SBA microloan can provide you with the capital you need to start or expand your business. But a potential downside is that you can only borrow up to $50,000.
If you need to borrow a larger amount, consider applying for a conventional business loan or an SBA 7(a) loan instead. If you go with a conventional business loan, you may want to research lenders to see which one offers the lowest interest rates and best terms that your business qualifies for.
Minimum credit score requirements vary by lender. Some microlenders don’t have a minimum credit score requirement but will still review your payment history and credit report to determine whether you qualify. If you have a bankruptcy listed on your credit report, you might have trouble qualifying.
SBA loan approval times vary by lender. But if you’re approved, you can generally expect to receive your funds within 30 to 90 days.
No, SBA loans tend to have strict guidelines for eligibility because businesses have to meet the SBA’s as well as the lender’s specific criteria. SBA loans are also competitive because they offer relatively low interest rates and long repayment terms.
Arrow Right Contributor, Personal Finance
Jerry Brown is a contributing writer for Bankrate. Jerry writes about home equity, personal loans, auto loans and debt management.
