Whether you're just getting started or ready to take your business to the next level, a microloan from the Small Business Administration (SBA) can help your small business grow.
Microloans are available in amounts of up to $50,000. They can be used for cash on hand to run your business (aka working capital) or pay for inventory, supplies and equipment.
If you think an SBA microloan could help your business, here are a few things to know about how the program works, who's eligible, how you can apply and ways you can use the money.
How does the SBA microloan program work?
While any eligible small business can apply for an SBA microloan, the program is designed to help historically underserved populations, including women, minorities, veterans and low-income business owners who may have difficulty obtaining funding from banks.
But the program doesn't just offer loans to eligible applicants. It also provides marketing, business training and industry-specific technical assistance to business owners.
While the Small Business Administration establishes guidelines for the microloan program, it doesn't provide loans directly to small businesses. Instead, the SBA provides funds to nonprofit, community-based lenders that lend the money to small business owners.
SBA microloans are available in amounts of up to $50,000. The average loan amount is around $13,000, and interest rates generally range from 8% to 13%. But lenders and borrowers work together to negotiate interest rates on a case-by-case basis.
The maximum loan term for an SBA microloan is six years, but terms vary based on how much you borrow, what you plan to use the money for and the lender's requirements.
Who is eligible for a microloan from the SBA?
The Small Business Administration microloan program is open to for-profit small businesses and nonprofit childcare centers that meet the SBA's size standards and the following SBA microloan requirements:
Registration and location
Your business must be registered, and it must be located and operating legally in the United States or its territories.
Investment
The SBA wants to invest in businesses that will be successful. To demonstrate your commitment to launching or growing your business, you'll need to show you've already invested time and your own money in your business.
Financing options
The SBA microloan program is designed for people who are unable to secure funding from other sources. So, you need to show that you tried and were unable to get financing from other lenders.
No criminal history
If you or your employees have been convicted of a crime that involves fraud or other dishonest acts, such as embezzlement, theft or larceny, you aren't eligible for a loan through the SBA microloan program. If you operate a childcare business, you can't get a loan if you or your employees have been involved in an offense against a child.
How to apply for an SBA microloan?
Since the Small Business Administration provides microloan funds to intermediary lenders, you'll need to work with an SBA-approved lender to apply for a loan.
In some situations, you may need to participate in training or planning sessions to help you launch or expand your business before the lender reviews your application.
Each lender that participates in the SBA microloan program has its own eligibility requirements and is responsible for making loan decisions. The Small Business Administration does not evaluate loan applications.
In general, here are the factors SBA microloan lenders will likely consider when making a loan decision.
- Credit history. Just as a bank or credit union reviews your credit history when you apply for a mortgage or auto loan, the lender will review your credit history when applying for an SBA microloan. But don't let a less-than-perfect credit history stop you from applying. Business owners with a poor credit history may still qualify.
- Collateral. Many SBA microloan lenders require collateral to secure the loan. You can use business or personal property, such as equipment or a vehicle, as collateral. If you’re unable to repay the amount you borrow, the lender has the right to take your property and sell it as payment for the loan.
- Business plan. The lender may ask you to provide a business plan to show how you plan to use the money and what your financial projections are for the future.
- Ability to repay. Lenders want to know you'll be able to repay the loan if they approve your application. If you're just getting started, you might need to provide financial projections with your future estimated revenue stream. Remember, the maximum term is six years and varies by lender.
How can I use the money from an SBA microloan?
If your loan application is approved, you can use the funds for:
- Working capital
- Equipment and machinery
- Supplies and inventory
- Furniture and fixtures
You can't use the money to pay off existing debt or buy real estate.
The type of equipment and supplies you need will vary, depending on the type of business you have. So, let's take a look at some specific ways individual businesses can use the money.
Let's say you have a clothing boutique. You were strapped for cash when you opened, so you used secondhand supplies, but now you're ready to give your business a facelift. You can use the money from an SBA microloan to buy new shelves, racks, mannequins and hangers to display clothing.
You don’t need a physical location to get a loan
Don't have a traditional brick-and-mortar location? An SBA microloan may still be able to help. Let's say you have a landscaping business, and you want to get some new clients and replace some of your aging equipment. You can use an SBA loan to build a website, buy equipment and upgrade your tools.
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