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Home Business Loans SBA Microloans: A Comprehensive Guide
You might consider an SBA microloan if you’re trying to start a business or expand your current small business. These loans are available for $50,000 or less and come with low interest rates and flexible repayment terms.
Before applying, however, it’s key that you understand how the program works and its eligibility requirements, as this information will help you determine whether or not an SBA microloan is the right choice for your business. Let’s start with the basics…
The SBA microloan program provides small loans up to $50,000, and it’s designed for small businesses and eligible nonprofits. According to the SBA, the average microloan is around $13,000.
These loans can be used for working capital needs and to purchase equipment and inventory. However, it’s also worth noting that you can’t use the funds to pay down existing debt or buy real estate.
When you receive a microloan, the funds won’t come directly from the SBA. Instead, the SBA provides the funds to intermediary lenders, which are usually nonprofit, community-based organizations.
SBA microloans are available to all for-profit small businesses and certain nonprofit child care centers. Unlike other types of loans, you may qualify even with a limited credit history.
That’s because microloans are designed for individuals who might struggle with qualifying for a traditional loan. That includes women- and minority-owned businesses and borrowers from low-income communities.
Of course, each lender will have its own eligibility requirements, but most will ask for some type of collateral and a personal guarantee from the business owner. Some SBA microloan lenders will have credit requirements, while others may not.
The interest rates will vary depending on your lender, but they typically range between 6% and 9%. And repayments terms are available for up to seven years.
Now that you understand what an SBA microloan is and what the basic requirements can be, an understanding of its pluses and minuses can help you make the right call for your business:
Availability is limited: Since SBA microloans are offered by nonprofit intermediary lenders, these loans can be harder to find. These lenders don’t have the resources and staff that larger lenders have, so these loans might not be available in your area.
Since the SBA doesn’t distribute the funds, the first step is to find an SBA-approved intermediary lender in your area. Fortunately, the SBA has hundreds of lending partners located across the country and provides a Lender Match Tool to help you find a microloan lender.
Most lenders will require you to either speak to a lending specialist over the phone or apply in person. The lender you work with will inform you about any necessary paperwork and documentation to apply. In addition, some lenders may require that you complete a workshop or training program as part of the application process.
Once you’ve submitted all the required paperwork, your application is complete, and your lender will review and process the loan.
If you’re not sure if an SBA microloan is the right fit for your business, here are some alternatives to consider:
SBA microloans can help startups and small businesses access the capital they need. These loans are a good option for traditionally underserved borrowers, like women and minorities. If you’re interested in exploring your loan options, you can use Lendio to quickly compare loan offers from multiple lenders.
Applying is free and won’t impact your credit
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For the past five years, she's dedicated more than 10,000 hours of research and writing to more than 2,000 articles about personal finance topics, including building credit, mortgages, and personal and student loans.
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