If you’re a small business owner or a startup company, then you probably know about SBA microloans. If not, then this might be the best time for you to learn all about it. This ultimate guide to SBA microloans will help you understand what it is and why you probably need it now.

SBA Microloan

First off, an SBA microloan is a funding for start-ups, newly established, or small businesses that the Small Business Administration makes available through intermediary lenders. Small business owners who are deemed qualified can receive up to $50,000 loan amount. Intermediary lenders typically set their own rates and requirements for eligibility, and determine the minimum loan amount. They also process the applications, release the loan amount, and oversee the loan from end to end.

The SBA microloan program was specifically created to assist businesses owned by veterans and women, low-income persons, minority-owned businesses, and other small business owners or entrepreneurs.

How Can I Use an SBA Microloan?

Microloans can be used primarily for business expansion. A microloan is particularly useful when you need less than $50,000 as a working capital, to repair anything business-related – including a home workspace if you are home-based, to purchase supplies, furniture, or equipment and machinery. The only thing that is not allowed is to use it to pay existing debts or buy real estate property.

How does it work?

You’ll have to deal closely with one of the SBA’s intermediary lenders if you want to apply for an SBA Microloan. These lenders must meet the SBA’s basic requirements, but they are free to set their own conditions as long as they go beyond the standards of the SBA and must not be discriminatory. The SBA recognizes that small businesses may not be able to offer collateral, so they encourage lenders to define what is acceptable collateral that business owners can provide. For the most part, these loans demand collateral if it is available. The SBA microloan program, on the other hand, recognizes that borrowers may not have collateral. Lenders are encouraged to “be inventive in their definitions of acceptable collateral,” according to the Standard Operating Procedures for these loans.

To help borrowers succeed, SBA microloan lenders must give free technical assistance. This may necessitate the completion of training courses aimed at assisting you in expanding and growing your company.

Who can avail of an SBA Microloan?

As mentioned earlier, intermediary lenders have their own requirements for eligibility. In general, though, businesses applying for microloans must meet the following criteria: For the microloan program, each lender will define its own SBA eligibility conditions. Businesses must, however, generally meet the following basic criteria:

  • Be a for-profit startup, freshly established, or expanding small business (nonprofit childcare centers may also qualify)
  • Must meet the SBA’s size requirements for a small business.
  • Must be located within a lender’s area of jurisdiction
  • Has no record of bankruptcies and foreclosures in the last two years
  • Cannot work in an industry that is disqualified (equivalent to 7(a) restrictions)
  • You must be a U.S. citizen, a lawful permanent resident, or a non-citizen with a work permit who is legally present in the United States.
  • Proof of sufficient funds to cover your loan repayments
  • Have good credit history with other personal or business creditors
  • Establish a need for funding and/or an inability to obtain bank financing
  • If a company wants to borrow more than $20,000, it must pass a “credit elsewhere” test, which basically proves the company can’t acquire equal funding from non-federal sources. Don’t be concerned; the lender will take care of the paperwork.

Applying for an SBA Microloan

If you have determined that you are qualified to apply based on the above criteria, then you can now contact an SBA-approved intermediate lender in your area. You can check the SBA website for a list of these intermediaries and find one that is closest to you. You will submit your application directly to the intermediate lender, and you will have to provide information on the purpose of the loan. Each lender may require specific documentation; however, you should be prepared to provide the following:

  • Your individual tax returns from the last two years, at least.
  • Company pays stubs from the last few months.
  • A list of collateral.
  • Your business plan.
  • Cash flow forecasts.
  • Purchase agreements, estimates, and contracts.

Existing businesses will also have to provide their business financials, which may include the following:

  • Business tax returns.
  • Income statement and balance sheet
  • Contracts and leases for businesses.
  • Business permits and licenses.
  • A list of the company’s current assets.

Minimum Credit Score Requirement

This program does not have a minimum personal or company credit score requirement. Borrowers in this program usually lack sufficient credit history or have worse credit scores than business owners who are seeking 7(a) loans. SBA micro-lenders must decide if the applicant’s credit is acceptable. If the borrower has problems with his credit history, they may require a satisfactory explanation for this.

Loan Terms

Repayment of a microloan is done monthly, and can have a maximum term of six years. Loan terms, however, vary depending on the loan size, how you intend to use the funds, the intermediary lender’s requirements, and the borrower’s needs. Interest rates differ depending on the intermediary lender and the costs incurred by the intermediary from the U.S. Department of Treasury. Prepayment penalties are non-existent.

What are the Pros and Cons of SBA microloans?

Pros:
  • SBA Microloans are disbursed faster than traditional loans.
  • Many SBA lending programs have lengthy application procedures that can take months to process. SBA Microloans, on the other hand, can be disbursed in roughly a month. In other cases, payments can be disbursed even more quickly.
  • The SBA provides funding to businesses that might otherwise be turned down by traditional lenders.
  • SBA loan programs are designed to help firms who are having trouble obtaining capital through regular means. This covers both struggling established enterprises and new businesses that are just getting started.

SBA microloans charge low fees, viable interest rates, and protracted repayment terms.

Lenders take a risk when they lend to a business because they must face the possibility of the company failing to repay its loans. The lender will most likely lose money if the firm fails. For this reason, the SBA guarantees a portion of the loan, minimizing lenders’ risks. This allows lenders to lend at a cheaper interest rate than they would otherwise be able to, and entertain firms that have trouble obtaining other types of funding.

SBA Microloans Can Cover a Wide Range of Business Expenses

Pay for your inventory and supplies with SBA Microloans, or use it as working capital, or to purchase equipment, furnishings for your office, or to set up a home office. It can be used for just about any business cost you can think of, except, of course, buying real property.

Loan Terms

Often these loans available to small businesses are very short-term loans. Borrowers often just have a few months to repay them. SBA Microloans, on the other hand, have loan terms of up to six years, which makes the monthly payments more manageable.

Cons:

Small Loan Amount

The disadvantage of SBA microloans is that they are small scale business loans as the name implies. You can borrow only up to $50,000, and intermediary lenders are typically required to keep a portfolio of loans with an average loan amount of no more than $15,000, so smaller funding amounts are common. Since many businesses require bigger amounts to expand and develop their business, you will need to consider other loan options. If you require more than $50,000 to expand your company, you may need to look for funding elsewhere.

SBA Microloans Have Spending Limitations

SBA loans have stipulations identifying what you can and cannot buy. These requirements may differ from one program to the next. You cannot use an SBA microloan to buy a property or pay off current loans.

Limited Accessibility

These loans could be difficult to come by. Sometimes, they may have specific coverage areas only which may not include your area. One reason is that the non-profit lenders who offer these loans do not have enough budget for marketing as well as limited funding compared to bigger lenders.

Having to deal with the Government as well as a Financial Institution.

Although the SBA and its partner institutions have simplified the application process, you will still need to work with these two distinct organizations. You’ll need to accomplish the lender’s loan application procedure, while also fulfilling the criteria and maintaining a connection with the SBA.

Different Eligibility Requirements

Each lender has their own eligibility criteria. Some lenders, for example, will require better credit scores and will scrutinize your company’s balance sheet more thoroughly than others. Although the loan parameters are set in place by the SBA, it’s the lender who approves or rejects loans, not them.

Deciding on Getting a Microloan

If you’re still undecided about getting an SBA Microloan, here’s a helpful way to help you decide. Consider the following three scenarios:

You only need a small sum of money.

If you don’t need more than $50,000 to buy inventory, new equipment, or furniture, an SBA microloan could be a practical way to get the money you need if you do find a lender and you qualify for it.

You’ve had difficulty obtaining funding elsewhere.

If you’ve tried and failed to obtain traditional bank loans, an SBA microloan can help you get the funds you need to expand your business.

You need considerably more time to pay the loan

You can repay your SBA microloan over a period of up to six years. This is a definite advantage over other types of business loans, which have significantly shorter repayment terms and much bigger monthly payments.

Granted, SBA Microloans have a lot of advantages over other loans, but you’ll eventually realize that they are not for everyone. Here are some scenarios when you should avoid SBA microloans at all costs:

You need a loan of more than $50,000.

The SBA microloan is not sufficient for business needs that are more than $50,000. There are other financing options available if you require a substantial amount for business expansion. You may look at traditional banks or loans instead.

You are qualified for other loans.

Since this type of loan is intended for borrowers who are financially disadvantaged and are unable to obtain similar loans from other lenders, it would be advisable to avail of other loans that may be better suited to your needs.

You intend to purchase real estate.

As stated earlier, an SBA microloan cannot be used to purchase a new office or warehouse. There are other loan types more suitable for purchasing a property.

You need the money immediately

If you meet the lending requirements, you could have your loan in a matter of weeks with an SBA Microloan. But if you have an urgent need, you should consider working with an online lender who can release your loan in a matter of days. Alternatively, you may be eligible for an SBA Express Loan.

Conclusion

If you are a community-oriented start-up or small business, then SBA Microloans may be an excellent option for you. It’s also a great addition to a more diverse investor portfolio. However, if you’re looking for a loan to purchase real estate or refinance debt, you should look into other SBA products. There are plenty of alternatives that may be better suited to your business’ needs and that you are actually eligible for. Furthermore, you have to remember that this type of loan is only available for small businesses that are unable to secure the options of traditional financing.

If you haven’t already looked into other types of business financing, such as loans from alternative lenders, merchant cash advances, business credit cards, and business credit lines, we can help you with it. Booster Financial offers various loan options and may be able to assist you efficiently with your business needs. Our financial advisors are ready and knowledgeable in giving you assistance to help you decide on the type of loan that you can avail.

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