SBA Microloan Quick Guide

There are many reasons why business owners may need to borrow capital. Examples include investing in new equipment or to expand operations; to provide better training and development for employees; and to enhance health benefits and improve salaries, among others.

What is a Small Business Administration (SBA) loan?

The SBA is a government agency dedicated to small business growth. The organization offers several loan programs for a wide variety of needs and company types, but the SBA does not directly lend money; they partner with banks, community development organizations and micro-lending institutions and set guidelines for how those lenders can structure loans.

Each type of SBA program is unique and involves parameters and stipulations not necessarily offered in the other SBA loan programs. These conditions often revolve around how the money can be used and the terms under which it should be repaid. The details of the program are constantly changing, so the more familiar your banker is with SBA loans, the simpler the process could be for you.


Advantages of an SBA loan

Guaranteed by the government

If the loan is defaulted or unpaid, the lender can ask the government to honor the loan. This reduces the risk to the lender, allowing it to extend credit to borrowers it might otherwise decline.

Favorable terms

Because of the government guarantee, lenders may be able to provide loans with more favorable terms than a conventional loan.

More time to pay

Repayment terms are longer than traditional loans, extended to up to 10 and even up to 25 years in some cases. Plus, on loan terms of less than 15 years, there is no prepayment penalty.

Affordability

SBA loans often require lower down payments, which allows the borrower to preserve the cash they need to operate the business.

Types of lenders that handle SBA loans

  • SBA standard lender – This qualified lender must submit transactions for review and receive a guarantee upon approval for every loan.
  • SBA preferred lender – This lender is the more qualified of the two types. Loan approval times can be reduced because the SBA checks only the lender’s justification of eligibility for the borrower, not their underwriting. 

How to Apply for a Small Business Administration Loan

Each type of SBA program is unique and often revolve around how the money can be used and the terms under which it should be repaid.

Ready to apply? Now it’s time to get ready to complete and present all the necessary paperwork. Follow the five steps to a successful SBA loan application:

Step 1: Know exactly what your business needs are

Know the answers to these questions:

  • Why do you need the money?
  • How much do you need?
  • How long will it take you to pay it back?
  • What is the current financial health of your business?
  • Do you have collateral to put up?
  • How much do you need?
  • How fast do you need the money?”

The answers you give may help determine your best course of action. Once you know how much you need and how it will be used, the better equipped you’ll be to determine the best loan option for your business needs.

Purpose of the borrowed funds

Back up your request with facts that support how much you are asking to borrow. Lenders appreciate the effort, and it will give them the confidence they need to trust in your ability to pay them back.

Step 2: Know what lenders are looking for

The 5 C’s of Credit

  1. Capacity – Can your business absorb unexpected expenses or a downturn in the economy?
  2. Capital – Do your assets outweigh your liabilities? How much capital have you and others invested?
  3. Collateral – This includes accounts receivable, inventory, cash, equipment, and commercial real estate.
  4. Conditions – Certain factors may affect your ability to make payments, such as the economy, industry trends, and pending legislation.
  5. Character Personal integrity, industry experience, credit history, and good standing are critically important.

Step 3: Provide an overall financial snapshot of your small business

Be ready to share details about the financial side of your business. Provide the lender with a comprehensive background on your company, future growth plans and your own personal information.

  • Maintain a good credit score
  • Borrow only what you know you can pay back
  • Present a repayment plan, complete with projections and a safety net
  • Show a history of paying bills on time
  • Provide collateral

Step 4: Choose the right SBA loan for your business

The 5 types of SBA Loans*

  1. SBA 7(a) Loan
  2. SBA Express Loan
  3. SBA Microloan
  4. SBA 504 Loan
  5. SBA Disaster Loan

*SBA loans and terms vary by lender.


SBA Microloan Overview

This is a very small, short-term loan, typically offered to new and growing small businesses and to certain types of not-for-profit child-care centers. For microloans, you may need to fulfill training or planning requirements designed to help you launch or expand your business in order to be considered eligible.

Ideal for

  • Working capital
  • Supply and inventory purchases
  • Equipment, including machinery and vehicles
  • Furniture and other office essentials such as printers and fixtures
  • Partner buyouts

Cannot be used for

  • Debt repayment
  • Real estate

Maximum repayment term

Seven years – varies based on:

  • Amount
  • Plans for the funds
  • Needs of the borrower
  • Specific lender requirements

Maximum loan amount

$50,000 (average loan: about $13,000)