SBA Microloan Credit Requirements and Eligibility

To get an SBA microloan, you'll need to meet the credit requirements and eligibility criteria. The maximum loan amount is $50,000, but the average loan size is around $13,000.

To be eligible, you must be a small business owner, and your business must be for-profit. You'll also need to have a personal credit score of at least 620 to qualify.

The SBA microloan program is designed for small businesses that may not qualify for traditional loans. Your business must be located in the United States and have a demonstrated need for the loan funds.

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To qualify for an SBA microloan, you typically need to be a startup or newly founded business, or a not-for-profit childcare center. You must also be located in the lender's state.

Some lenders focus on serving underserved communities, such as minority-owned and women-owned businesses, or those living in low-to-moderate income areas. In fact, according to the SBA, 50% of microloans in 2023 went to businesses from these communities.

To be eligible, you'll need a minimum credit score in the 500s or higher. You should also have a business plan with two to three years of revenue projections. Additionally, you'll need to be available for financial mentoring.

Here are the key eligibility factors:

It's worth noting that if you've been denied an SBA loan in the past, you can reapply after a 90-day waiting period.

Your personal credit score can impact your SBA microloan approval, with many lenders requiring a score of at least 680-700. This is because most applications ask for your Social Security number and request permission to run a credit check.

Business credit history also plays a role, as the SBA requires "acceptable credit" for most loans. However, there's no set minimum credit score requirement. Instead, lenders often rely on the FICO SBSS score, which uses both personal and business credit data to create a single score.

For SBA Small Loans, the minimum SBSS score is 155, which is used to determine loan eligibility. If you don't meet this minimum score, your loan application will undergo a more extensive credit review.

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Your personal credit history matters when applying for an SBA loan. Most applications ask for your Social Security number and request permission to run a credit check for each owner with ownership of 20% or more of the business.

Expect your credit score to be a factor in your approval. Many lenders require a personal credit score of at least 680—700 or more.

The SBA doesn't set a minimum credit score requirement, but having a good credit score can improve your chances of approval. You can improve your business credit history through tradeline reporting.

You'll need to know your borrowing power from your credit details to access the best funding. A good personal credit score can also help you qualify for better loan terms.

Most lenders require a personal guarantee, which is a promise that if the business can't pay the loan, you will then be personally responsible for payments. This guarantee is binding regardless of entity type.

Here's a breakdown of the minimum SBA credit score requirements by loan type:

Industry restrictions can be a major hurdle when it comes to securing an SBA loan. There are several industries that the SBA will not guarantee a loan for.

These industries are typically identified by a SIC or NAICS code, which is crucial to ensure yours is correct on your business credit reports. This can make all the difference in getting approved for an SBA loan.

Businesses that are primarily engaged in lending are not eligible for SBA loan guarantees. This includes companies that offer financial services, such as banks and credit unions.

Earning a passive income from real estate rental income without providing additional services, except for Eligible Passive Companies, is also not allowed. This means you need to be actively involved in the management and maintenance of the property.

Life insurance carriers are also restricted from receiving SBA loan guarantees. This is a key thing to consider if you're in the insurance industry.

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The SBA has strict rules against businesses that offer pyramid sale distributions or compensations. This is a major red flag for the SBA, and it's essential to avoid this type of business model.

Businesses that get over one-third of their annual revenue from gambling services are also not eligible for SBA loan guarantees. This includes casinos, sportsbooks, and other gaming establishments.

Enforcing restrictive membership rules is also a no-go for the SBA. This means you need to have an open and inclusive membership policy to be eligible for an SBA loan.

Primarily offering religious services is another restricted industry. This includes churches, mosques, synagogues, and other places of worship.

Government-owned businesses are not eligible for SBA loan guarantees, with the exception of Native American tribal affiliations. This is a key thing to consider if you're a government contractor or have ties to a government agency.

Selling live adult entertainment services is also a restricted industry. This includes strip clubs, adult theaters, and other similar businesses.

Lobbying or engaging primarily in political activities is also not allowed. This includes businesses that specialize in advocacy, lobbying, and other forms of political activism.

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Businesses that package SBA loans are also restricted from receiving guarantees. This means you need to be a direct lender or have a different business model to be eligible.

Lastly, speculators, such as those involved in oil wild-catting or research and development, are also not eligible for SBA loan guarantees. This is a key thing to consider if you're in the energy or tech industries.

Here are some examples of restricted industries:

The SBA microloan program offers a range of key features that can help you understand what to expect.

Repayment terms can last up to seven years, allowing you to pay back the loan over a manageable period. For microloans approved in fiscal year 2021, repayment terms can extend up to eight years.

The interest rate typically ranges from 8% to 13%, and is negotiated between you and the intermediary. This means that you'll need to discuss the terms with your lender to determine the interest rate that works for you.

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You can borrow up to $50,000, which can be used for various business purposes such as supplies, equipment, and fixtures. The loan amount is the same across all SBA microloan programs.

Lenders may charge borrowers packaging fees of up to 3% of the loan amount for loans of one year or more and 2% for loans with terms of less than one year. This fee is typically charged to cover the costs of processing your loan application.

Here are the key features of the SBA microloan program at a glance:

For new businesses or start-ups, banks like to see a larger down payment of about 30 percent.

This is because lenders consider start-ups more risky, as there's no business history to prove its profitability.

If you're acquiring an existing business or franchise, you may have a smaller down payment requirement of around 20 percent.

This is because banks may see existing businesses as less risky, having a proven track record of profitability.

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Your business's ability to generate income, also known as cash flow, is crucial in determining your capacity to repay borrowed debt. This is where lenders look at your income, your spouse's income, and the business's income to gauge your confidence in making monthly payments.

Banks will put more weight on your outside income sources if you're funding a new business. This is because they're not yet familiar with the business's financials.

If you're purchasing an existing business, lenders will take a closer look at the business's tax returns and recent financials. This will give them a better understanding of the business's financial stability.

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To apply for an SBA microloan, you'll need to gather a lot of documents. Here are some of the essential ones: personal identification, business license, and operating agreement.

A business plan is also crucial, as it shows lenders how you intend to use the loan funds. You'll also need to provide personal tax returns for at least two years, recent pay stubs, business tax returns, and a balance sheet and income statement.

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You'll also need to provide cash flow projections, a list of collateral and current business assets, and an existing debt schedule if applicable. This might seem like a lot, but it's essential to have all your financial ducks in a row.

Here are some of the key documents you'll need to gather:

You may also need to provide a detailed outline of how you plan to use the loan funds, as well as a copy of your business license.

To get an SBA microloan, you'll need to gather financial and legal documents, including business bank account statements and business financial statements.

Your lender may also require personal financial statements, so it's essential to keep your bookkeeping up to date.

Building a strong credit profile takes time, so start working on it before you need funding, ideally at least a few months in advance.

Most SBA loan rates are quite affordable to begin with, and maximum rates are set by the SBA.

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Your credit scores can determine whether you qualify for a small business loan, and may also affect the interest rate you pay.

Some SBA loan rates may be determined in part by credit, such as a portion of CDC 504 loans made by a bank or financial institution.

Build business credit to potentially qualify for more favorable loan rates.

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Having a large enough down payment is crucial for being approved for an SBA loan. This down payment is also known as your equity injection.

Banks aren't willing to cover 100 percent of your project cost. They want to see that you have a personal stake in the success of the business.

The amount of capital you need to put down varies by your type of SBA funding and your business. For SBA 7(a) loans, banks often prefer to see 30 percent down for a new business.

Existing businesses and franchises typically require 20 percent down. This is a significant investment, but it shows lenders that you're committed to your business's success.

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If you're planning to apply for an SBA microloan, be aware that a personal guarantee is required from all owners with 20 percent or more ownership.

For married couples, each spouse with a five percent or greater owner interest must personally guarantee the loan if the combined interest between the two spouses is 20 percent or more.

This means that even if your business is structured as an LLC, you will still need to provide a personal guarantee.

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If your business doesn't qualify for an SBA microloan, there are other options to consider. Conventional business loans are a possibility, but online lenders may charge higher interest rates.

You may want to explore grants, which offer funding that doesn't need to be repaid. Some grants target underserved or low-income communities.

Business credit cards can cover similar expenses as microloans, with credit limits up to $50,000. They're more widely available than SBA microloans.

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Non-SBA microloans are offered by other lenders, including online lenders like Accion Opportunity Fund and Kiva. Community Development Financial Institutions (CDFIs) and Minority Deposit Institutions (MDIs) also provide these loans.

Invoice factoring or financing allows you to sell unpaid invoices to a company to collect payment, or use them to secure financing. Either way, the financing company advances cash against those invoices.

Merchant cash advances are available, but they come with high fees that cost much more than traditional business loan interest. They should be considered a last resort.

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