SBA Microloan: What Is It And How To Apply In 2024?

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SBA Microloan: What Is It And How To Apply In 2024?

If you are the owner of a small business and you do not want to choose traditional loan options for businesses, you can go with an SBA microloan. The United States Small Business Administration funds these smaller-sized loans for small businesses. Basically, the body designed this loan program to finance those businesses that remain underserved.

In this article, you will learn about microloans in general and how they work for small businesses. Apart from that, we will also discuss the major features of SBA microloans. Next up, we will share with you some of the major pros and cons of microloans so that you get a better idea of what to expect. Finally, we will show you how to apply for microloans with the SBA. Hence, to learn more, read on through to the end of the article.

What Is A SBA Microloan?

What Is A SBA Microloan

According to Investopedia,

SBA microloans are loans that the U.S. Small Business Administration (SBA) provides for up to $50,000 through intermediary lenders to help entrepreneurs grow their small businesses. Microloans can be used for many different purposes, such as for working capital or inventory. But they have some limitations—for example, they cannot be used to pay debt.

However, once you apply for a microloan, the loan terms and rates that you will get depend on the lender who offers you the money. Here, the applicants that typically apply for microloans are startups and small businesses. Apart from that, these businesses also include women-owned businesses and businesses from low-income communities.

Basically, by applying for an SBA microloan, expect to receive up to $50,000 as funding. Hence, it is one of the most popular SBA loans for small businesses. However, the microloan that you receive will come from an intermediary lender on the US SBA platform.

After you receive the microloan, you can use it for a variety of cases. Mainly, these include expansion of business, repair, and more. Also, you can use the microloan to reopen your small business or pay for expenses related to inventory, working capital, and supplies. However, you cannot use the SBA microloan funds to pay off your debt or buy real estate.

What Are The Major Features Of A SBA Microloan?

What Are The Major Features Of A SBA Microloan

One of the major things that you must know about SBA microloans is that there are eligibility criteria for lenders as well. Furthermore, there are also SBA restrictions for lenders to lend up to only $50,000.

According to NerdWallet,

SBA microlenders typically require collateral to secure the loan against nonpayment. If you take out a microloan to purchase equipment, that equipment will serve as collateral for the loan. In most cases, you’ll also need to sign an SBA loan personal guarantee stating you will repay the financing.”

Essential Features Of SBA Microloans

The following are some of the major features of SBA microloans that you need to know:

FactorsFeatures
Maximum Amount Of The LoanThe SBA microloan can provide a loan to a small business of up to $50,000. Generally, the average amount of the loan is $13,000.
Terms Of The MicroloanDepending on the amount you need, the term of the loan might vary. In general, the maximum repayment term can be up to six years. However, the average term is forty months.
Rate Of InterestThe interest depends on the lender of the loan. However, expect the interest rate to be between 8% and 13%.
Fees For The LoanThere are certain fees for microloans. For example, some intermediaries might charge a packaging fee of up to 3%. On the other hand, for loans with a term of less than a year, the packaging fee is up to 2%.
Collateral For The MicroloanWith SBA loans, there are no specific criteria for borrowers when it comes to collateral. However, a microloan borrower will need to provide collateral. This helps the loan intermediaries to maintain cash reserves and loan balances equal to 115%.
Personal Guarantee For The LoanHere, it depends on the intermediary of the loan. The lender might require you to provide a personal guarantee for the microloan. If the business is not able to repay the loan, the lender can hold you responsible.

What Are The Major Pros And Cons Of A SBA Microloan?

The following are the major pros and cons of SBA microloans:

Pros Of SBA Microloans

Here are the major pros of SBA microloans that you will benefit from:

  • You can use the loan for a variety of purposes
  • Startups and businesses with bad credit can also apply
  • Competitive rates of interest and low fees. Also, you will get long repayment terms.
  • Intermediaries in the loan can offer business training and educational resources.

Cons Of SBA Microloans

Here are a few cons of SBA microloans that you must be aware of:

  • If you have a low credit score, it can be difficult to qualify
  • There are different eligibility requirements for intermediary lenders
  • The loan requires collateral

How To Apply For SBA Microloans? – Steps To Follow

The official website of SBA states –

Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. Individual requirements will vary. To apply for a microloan, work with an SBA-approved intermediary in your area. SBA-approved lenders make all credit decisions and set all terms for your microloan.”

Here are the steps you need to follow to apply for an SBA microloan:

Step 1: Go to the SBA website and submit your microloan application to an intermediary lender. The SBA will also offer you a list of participating microlenders.

Step 2: Different lenders will have different requirements. Here, you might need to provide financial documentation about your business finances.

Step 3: Check your status regularly. Generally, you will get the funds in your account within 120 days.

Wrapping Up

Hope this article was helpful for you in understanding how to get an SBA microloan for your small business or startup. Before you consider applying for a loan by following the steps above, consider going thoroughly through the features of microloans and their pros & cons. Do you have more information to add regarding microloans? Consider sharing them with us in the comments section below.

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