August 8, 2022
Adam Hoeksema
A traditional bank will take customer deposits and then turn around and lend those dollars to small businesses. Typically a traditional bank would be structured as a for profit business looking to maximize profits for shareholders. SBA Microlenders on the other hand must be non profit organizations that are lending based on a mission to support the underserved. Yes SBA Microlenders need to be sustainable, but as non profits they don’t have to maximize profits which means they are willing to make very small loans to businesses that might not be profitable for a traditional bank.
The SBA actually lends low cost capital to independent, local SBA microlenders around the country, then the SBA Microlender will lend directly to business owners in the community.
In addition to low cost capital to lend, the SBA provides microlenders with Technical Assistance grant funding which helps subsidize the cost of operating the microloan program. This allows SBA microlenders to hire staff to help support entrepreneurs during the loan application process. The reason that the grant funding is necessary is because a lender simply doesn’t make much money on a small loan. For example, an SBA microlender that makes a $10,000 microloan at 8% for 3 years will earn approximately $1,200 in interest income over the life of the loan. The amount of staff time required to make a $10,000 microloan is roughly the same amount of time as it takes to make a $100,000 small business loan, but the lender would earn $12,000 in interest income, 10x more, on the larger $100k loan. So lenders are incentivized to focus on larger loans which is why a traditional, for profit bank which is obligated to maximize profits for shareholders will not be interested in making small microloans.
How to Get an SBA Microloan?
In order to secure an SBA Microloan, you will need to have a for profit small business that meets the SBA definition of “small business” or a non profit childcare business. If you are applying for a loan of more than $20,000 you will need to meet a “no credit elsewhere” test which effectively means that the SBA wants you to go to your local bank and apply for a loan at the bank first. This helps to ensure that the SBA Microloan program is not competing with the traditional banking industry. The purpose of the SBA program is to fill a gap where the banks are not lending, so they want to make sure that you are not “bankable” yet. If your bank has declined you formally or informally, then you can apply for an SBA microloan.
How to Apply for an SBA Microloan?
In order to apply for an SBA Microloan you will need to find a local SBA Microlender in your area. Since SBA microlenders are independent non profits, each loan application requirement might be different between microlenders, but most lenders are going to want some or all of the following documents:
If you are a startup:
- Business plan
- Financial projections (See: 60+ Financial Projection Templates)
- Personal Financial Statement
- Personal Credit Report
- Last 2 years of Personal Tax Returns
If you are an existing business:
- Last 2 years of Business Tax Returns
- Current Balance Sheet (See: Free Balance Sheet Excel Template)
- Current Year Income Statement (See: Income Statement Template)
- Personal Financial Statement
- Personal Credit Report
- Last 2 years of Personal Tax Returns
As you start pulling together documentation for your SBA microloan application, it is time to find an SBA Microlender in your area.
Where to find an SBA Microlender?
Since the SBA Microloan program is not operated from a federal level, but through a network of independent, local SBA Microlenders, you will need to determine whether there is an active SBA microlender in your area. Some states, like California, have many quality SBA microlenders in California, but other states have fewer options. You can find an SBA Microlender here.
You can see how to use the tool to find an SBA Microlender in this short video I created.
What are the Approval Odds for an SBA Microloan?
Although SBA Microlenders are likely to say yes more often than a traditional bank, this is still a loan application and microlenders need to say no sometimes. Based on my experience at Bankable, we approved roughly 30% of the loan applications we received. Why did we still have a 70% decline rate? Well, as a microlender you can only afford to have a 5% default rate at most. You are probably earning 8% on the loan that you made, you have to pay the SBA roughly 1% interest, and if you have 5% of your loans defaulting, that gives you a thin margin on your lending business, but with other grants you ought to be able to maintain a sustainable operation with a 5% default rate. This means that you have to be right 95% of the time. 95% of the time you need to make loans to clients that will repay in full. This is a tough business, so it means that SBA microlenders still have to say no to applicants sometimes.
What are the loan terms for an SBA Microloan?
SBA Microloans can have terms of up to 6 years. Based on my experience at Bankable, our average microloan term was roughly 3 years.
What is the interest rate for an SBA Microloan?
Each microlender might have a slightly different interest rate, but the SBA limits the rates that can be charged. I would expect a loan closing fee of 3% or less and an interest rate of 10% or less. Our average interest rate at Bankable was 8%. All SBA microloans come with a fixed interest rate, so you won’t have to worry about your rate going up after you take out the loan.
Can a Startup get an SBA Microloan?
Yes. A startup is eligible for an SBA microloan according to the SBA program requirements; however, each SBA Microlender will make their own underwriting decisions. At Bankable, roughly 50% of our borrowers were less than 2 years in business, and 25% were brand new startups.
Will I qualify for an SBA Microloan?
Each SBA Microlender will have their own underwriting requirements which means it is difficult to determine on a national scale how likely you are to be approved for an SBA Microloan. Based on my experience, you should think of SBA microlenders as bank lenders that are just a bit more relaxed. So if the bank wants a 650 minimum credit score, an SBA microlender might require a 600 minimum credit score. If the bank wants you to have collateral worth 120% of your loan value, a microlender might want collateral worth 75% of your loan value. Microlenders often have more flexible standards, so there might not be a specific minimum credit score or collateral value or cash flow ratio, but the better you are in any department will help your chances!
What credit score is required for an SBA Microloan?
There is no minimum credit score for an SBA Microloan. At Bankable, we made many microloans to borrowers with a credit score in the 500s. Typically, those borrowers had something else that made their loan application strong like great cash flow or collateral that helped counteract the bad credit score. If you don’t know your credit score, I always suggest Credit Karma as a good place to check your credit score for free.
Can I get help with my SBA Microloan application?
One of the great things about SBA Microlenders is that they have staff and resources that are there to help you with your loan application. If you don’t have a business plan they might have a template and a coach willing to help you write your business plan. Some SBA microlenders even license our financial forecast templates to provide to their clients for free. If you need help pulling together your bookkeeping, they might be able to help you with a tool like Quickbooks, or connect you with a coach at your local SCORE office where you can receive free business support.
So there you have it, everything you need to know about SBA Microlenders. If you have other questions, please let us know, I would love to add more questions and answers to this post over time, so contact us here and let me know what is on your mind!
