What Is an SBA Microloan, and How Does It Work?

SBA microloans can be used for investing in growth, but there are some restrictions

Fact checked by Vikki Velasquez
Reviewed by Katie Miller

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. The loan terms and rates on SBA microloans will vary depending on the intermediary lender. The typical microloan applicants are startups and existing small businesses.

Key Takeaways

• SBA microloans provide up to $50,000 in funding to small businesses via funding intermediaries.
• You can use microloans to expand, repair, and reopen your small businesses to pay for expenses like working capital, inventory, or supplies.
• You cannot use the funds from an SBA microloan to buy real estate or pay off debt.
• SBA-approved intermediary lenders have individual lending and credit requirements.

How SBA Microloans Work

The SBA supplies funds to intermediary lenders, which administer the loan program. These lenders are nonprofit community-based organizations. SBA borrowers submit their SBA microloan applications to a local SBA-approved intermediary. The SBA provides a list of designated intermediary SBA microlenders.

The SBA provides up to $5 million to an intermediary lender to issue SBA microloans. Then, the loans require a 15% nonfederal cash match.

SBA microloans are generally issued to startups and small businesses, but not-for-profit childcare centers may also qualify. SBA microloans are closed within 120 days of being approved.

Important

The terms of SBA microloans will vary, but most intermediaries will require you to provide a personal guarantee and some kind of collateral, which are assets pledged to secure the loan.

Main Features of an SBA Microloan

Like other types of loans, SBA microloans have specific terms, interest rates, fees, and other features. Let’s look in more detail at what they provide and what they require.

Maximum Amount

The SBA microloan program provides loans up to $50,000. The average loan amount is $13,000.

Terms

SBA-backed intermediaries set repayment terms, so they may vary from loan to loan. The terms will be determined in part by the loan amount and the borrower’s needs. The maximum repayment term for an SBA microloan is six years.

Interest Rates

Intermediaries determine the interest rates for microloans. You can expect interest to be about 8% to 13%.

Fees

You are responsible for paying a number of fees associated with an SBA microloan. For example, intermediaries may charge a packaging fee. The packaging fee is limited to 3% of the total loan amount for loans with terms of a year or more. For loans with terms of less than a year, the packaging fee is limited to 2% of the total amount of the loan.

Note

You may also have to pay closing costs, which could include fees for filing, credit reports, and collateral appraisal.

Collateral

The SBA does not give intermediaries specific criteria regarding collateral for specific loans. However, intermediaries typically require microloan borrowers to provide collateral because intermediaries must maintain cash reserves and loan balances that equal 115% of what the SBA provided the intermediary.

Personal Guarantee

In addition to collateral, intermediaries may also require you to provide a personal guarantee. Essentially, if the business is unable to repay the loan, then you, as the business owner, would be responsible.

SBA Microloan Uses

You can use microloans for a number of purposes, including:

• Machinery and equipment
• Supplies
• Inventory
• Furniture and fixtures
• Working capital

You cannot use the funds from an SBA microloan to pay off debts or buy real estate.

Note

In 2023 (latest information), $86.4 million in microloan funding went to more than 5,500 small businesses.

Eligibility Requirements to Get an SBA Microloan

How can you qualify for an SBA loan? SBA microloan requirements will vary depending on the intermediary lender. Common eligibility requirements include:

• Operating as a for-profit business (some nonprofit child care centers may be eligible)
• Operating in the intermediary’s approved area
• Meeting SBA small business size standards
• No disbarment from receiving federal funds

Requirements for Startups

The SBA considers businesses that have been operating for two years or less to be startups. Intermediaries may have specific credit scores and collateral requirements for startups.

Requirements for Existing Businesses Over 2 Years Old

Intermediaries may also have specific requirements relating to an applicant’s credit score and business cash flow if their business has been operating for more than two years. Borrowers with existing businesses will likely still need to provide collateral.

Pros and Cons of an SBA Microloan

SBA microloans can be a good option for small businesses that need a relatively small amount of money to help them grow or open, but it is important to consider the potential benefits and downsides.

Pros

• Microloan funds can be used for many different purposes.

• SBA microloans can be a good option if you do not qualify for other financing options.

Cons

• A low credit score can make it difficult to qualify for a microloan.

• Each intermediary lender can have different eligibility requirements.

• You will likely need to supply collateral.

Note

Other financing options for small business owners include conventional business loans, different SBA loan programs, or SBA grants.

SBA Microloan vs. SBA 7(a) Loan

The SBA microloan program and the SBA 7(a) loan program have some similarities and differences.

SBA Microloan

• Amount: Up to $50,000

• Eligibility: Varies depending on the intermediary

• Terms: Maximum of six years

• Interest rates: 8% to 13%

• Fees: Vary depending on the intermediary

• Collateral: Usually required

• Uses: Working capital, inventory, supplies, furniture, fixtures, machinery, and equipment

SBA 7(a) Loan

• Amount: Up to $5 million

• Eligibility: Must operate as a for-profit business in the United States; must seek other sources of financial assistance first

• Terms: 10 years for working capital, inventory, or equipment loans; 25 years for real estate loans

• Interest rates: Vary depending on the loan amount

• Fees: Vary

• Collateral: Collateral required for loans of more than $50,000

• Uses: Working capital, revolving funds, purchase of real estate, construction of new buildings, establishing a new business, refinancing business debt, and purchase of equipment, machinery, furniture, fixtures, and supplies

How to Apply for an SBA Microloan

To apply for an SBA microloan, submit your microloan application to an intermediary lender. The SBA provides a list of participating microlenders.

Each intermediary lender may have specific application requirements. They may ask you to provide financial documentation about your business and personal finances. An SBA microloan is funded within 120 days.

What Is the Smallest SBA Loan Amount?

The SBA offers small business loans from $500 to $5.5 million. Loan minimums and maximums will vary depending on the SBA program.

How Long Does It Take to Get an SBA Microloan?

Once your loan is approved, it can take up to 120 days to close. SBA loans generally take longer to get because you must meet more approvals. Both the SBA and the intermediary lender will have requirements.

Can You Get More than One SBA Microloan?

You can get more than one SBA microloan. The total amount borrowed with SBA microloans cannot exceed $50,000 at any one time.

What Is the Minimum Credit Score Required for an SBA Microloan?

The SBA does not list specific credit score requirements for its microloans, but business loan lenders may have their own specific criteria for minimum credit scores or other financial requirements.

The Bottom Line

SBA microloans can help startups and other small businesses seeking a relatively small amount of financing. Microloans can be used for many different purposes. While interest rates, fees, and terms will vary depending on the intermediary lender, you will have a maximum of six years to repay the loan.

If you need more funding or more flexible repayment terms, you can explore the SBA’s other loan programs or conventional financing options.