Like the name implies, SBA microloans are for small amounts of money. These loans go up to $50,000 at the very most. The Small Business Administration reports the average microloan amount is around $13,000.

The Small Business Administration itself funds microloans. As a government organization, the SBA can be more accepting of borrowers than a bank trying to earn profits. The SBA outsources the work of setting up the loans to intermediaries, usually nonprofit community organizations experienced with lending.

The microloan program specifically looks to help groups that have been historically underserved by traditional lenders, including women, low income, veteran, and minority entrepreneurs.

Microloans for women are the most popular. In 2021, 48% of SBA microloans were made to women business owners. But other borrowers are certainly not excluded. The SBA works with all business owners looking for small amounts of financing to help with working capital and other goals.

You can use an SBA microloan to expand, repair or improve an existing small business. You can also use this funding to reopen a business that has closed. If you want to launch a brand-new business, SBA microloans are available for startup borrowers too.

Some of the specific ways you can use SBA microloans for business owners include:

• Restocking inventory and supplies
• Buying new machinery and equipment
• Buying furniture
• Covering working capital, like salaries and rent

You cannot use an SBA microloan to buy real estate. The loan amounts are too small for this to be effective. Also, you cannot use the SBA microloan program to refinance or pay off any existing debts.

The SBA doesn't standardize the application requirements for microloans. Instead, each intermediary nonprofit microlender sets their own standards for borrowers. Some will require a credit check and have minimum credit score requirements.

Microloan lenders typically require you to put up some sort of collateral. Collateral is a valuable asset that you pledge to the lender in case you default on your loan. Examples include business equipment or a vehicle that you own. If you fail to repay the loan as agreed, the collateral becomes the property of the lender, and they will sell it to try to recover all or some of their losses. If you use your microloan to buy physical property, you might be able to use it as the collateral. Lenders usually also require a personal guarantee. If your business fails, you will still be obligated to pay off the debt.

Before you can apply, you might need to complete a business plan training course. This helps show the community lenders you will use the funds properly, as many applicants for microloans are just starting out and don’t have business experience.

The SBA primarily offers microloans to for-profit small businesses. Nonprofit childcare providers may also be able to take out a microloan.

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