SBA microloans: What they are and how to get one

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.

What is an SBA microloan?

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.

SBA microloan key features

What can an SBA microloan be used for?

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 microloan vs. SBA 7(a) loan

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.

Who qualifies for SBA microloans?

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:

• Minimum credit score in the 500s or higher
• Time in business ranges from startup to 2 years
• Located in the lender’s state
• Offering collateral or personal guarantee
• Business plan with two to three years of revenue projections
• Being available for financial mentoring

Pros and cons of SBA microloans

Pros

• Accessible to minority and bad credit businesses
• Includes support through education and mentoring
• No SBA loan guarantee fee

Cons

• Low loan amounts up to $50,000
• Approved lenders are limited
• May take 30 to 90 days to fund

How to get an SBA microloan

While the SBA loan application process varies by lender, below are some general steps you take to apply for an SBA microloan:

1. Find an SBA-approved microlender

The first step is finding an SBA-approved lender in your area. You can find one by reviewing this list of approved lenders.

2. Gather your documents

Although application requirements vary, you’ll most likely have to provide some or all of the following documents:

• Profit and loss statements
• Personal and business tax returns
• Payroll records
• A list of references
• Monthly budget for your household and business
• Business plan
• Business bank statements
• Detailed outline of how funds will be used
• Copy of business license

3. Submit a loan application

Once you’ve chosen an approved lender in your area that best matches your business needs, submit a loan application.

4. Wait for approval

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.

5. Receive funds

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.

Alternatives to SBA microloans

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:

• Conventional business loans. You may want to see if your business qualifies for a conventional business loan. Online lenders often relax the criteria for approval, though they may charge higher interest rates than traditional bank lenders.
• Grants. Business grants offer funding that small businesses don’t have to repay if they qualify and get awarded the grant. Some grants target underserved or low-income communities.
• Business credit cards. Business credit cards can cover similar business expenses as microloans, often offering credit limits up to $50,000. These are more widely available than SBA microloans.
• Non-SBA microloans. Other lenders may offer microloans, including online lenders like Accion Opportunity Fund and Kiva. You can also find these from Community Development Financial Institutions (CDFIs) and Minority Deposit Institutions (MDIs), lenders certified to serve specific communities such as minorities.
• Invoice factoring or financing. You can sell unpaid invoices to an invoice factoring company to collect payment or use unpaid invoices to secure financing. Either way, the financing company advances cash against those invoices.
• Merchant cash advances. A merchant cash advance looks at your past credit or debit card sales and provides funds you pay back based on future sales. But with high fees that cost much more than traditional business loan interest, they should be considered a last resort.

The bottom line

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.

Frequently asked questions

• What is the minimum credit score for an SBA microloan?

  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.

• How long does it take to get an SBA microloan?

  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.

• Does everyone get approved for SBA loans?

  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.