SBA Microloans Reach $50,000, but Nonprofit Lenders Set the Terms

The Small Business Administration’s Microloan Program is built for small businesses that need modest amounts of capital. The agency says loans can reach $50,000, and that the average loan is about $13,000.

Borrowers do not apply to the agency. They apply to a nonprofit lender that receives SBA funds, and that lender sets the terms. The sections below cover the funding structure, loan caps, repayment and interest rules, collateral and fees, eligible uses, and the borrower figures from a 2019 GAO review.

The SBA Lends to Intermediaries, Which Lend to Borrowers

The SBA provides funds to intermediary lenders, which are nonprofit, community-based organizations with lending and technical assistance experience. The intermediaries make all credit decisions and set all loan terms. In practice, the SBA funds the lenders, and the lenders decide who gets a microloan.

The limits on that funding are set in 13 CFR 120.706. An intermediary may borrow up to $750,000 from the SBA in its first year in the program and up to $3,000,000 in later years. An intermediary’s obligation to the SBA may not exceed $7 million in aggregate, subject to statutory limits on the funds available per state. The SBA’s loan to the intermediary must be repaid within 10 years, with no payments due in the first year and interest accruing from disbursement. After that, the SBA sets the periodic payments.

Intermediaries also fund part of each loan themselves. Under 13 CFR 120.708, an intermediary must contribute 15 percent of each SBA loan it receives, from non-federal sources. That contribution may not be borrowed. Community Development Block Grant funds count as non-federal sources for this purpose.

Repayment Limit
Each SBA Microloan must be repaid within seven years, and no borrower may owe one intermediary more than $50,000 at a time (13 CFR 120.707).

Loan Caps: $50,000 Per Borrower and a $10,000 Guideline

Under 13 CFR 120.707, an intermediary may not make a Microloan of more than $50,000. The regulation also says no borrower may owe an intermediary more than $50,000 at any one time. The two limits apply together, so a single borrower’s total balance with one lender is capped at the same figure as any one loan.

The regulation also says intermediaries should generally not make a Microloan of more than $10,000 to any borrower. That is guidance rather than a hard limit. Loans above $20,000 require the borrower to show it is unable to obtain credit elsewhere at comparable interest rates, and that it has good prospects for success.

The SBA’s program page puts the average Microloan at about $13,000. That figure sits below the $20,000 level at which the credit-elsewhere showing applies, and above the $10,000 guideline. The average is a program-wide figure, so individual loans may vary by lender and purpose.

Repayment Terms and Interest Rate Limits

Each Microloan must be repaid within seven years, according to 13 CFR 120.707. The SBA’s program page gives the same maximum term. It also says the actual term depends on the loan amount, the planned use of funds, the lender’s requirements and the borrower’s needs, so shorter terms are possible.

Borrowers pay rates that the intermediary sets within a cap. The SBA’s program page says rates generally fall between 8% and 13%. The regulation ties the cap to the rate the intermediary pays the SBA. For loans above $10,000, the cap is the SBA rate plus 7.75 percentage points. For loans of $10,000 or less, it is the SBA rate plus 8.5 percentage points.

The SBA rate to intermediaries is also set by rule. Under 13 CFR 120.706, it equals the five-year Treasury rate, rounded to the nearest one-eighth percent, minus 1.25 percent. Specialized intermediaries instead subtract 2 percent from the five-year Treasury rate. Because the borrower cap is built on the SBA rate, changes to the Treasury rate feed through to the ceiling on what borrowers can be charged.

What Intermediaries Pledge to the SBA and What Fees Apply

The collateral rules in 13 CFR 120.706 run from the intermediary to the SBA. The intermediary must pledge to the SBA a first lien position in the MRF and LLRF, as the regulation defines them, and in all notes receivable from Microloans.

If the intermediary cannot pay when due, the SBA may accelerate the loan and demand full payment. On default, or on a violation of the part or the loan agreement, the intermediary must surrender that collateral to the SBA. It is not liable for any remaining deficiency after liquidation, unless the loss was caused by fraud, negligence, a violation of the ethics requirements in § 120.140, or another violation of the part.

The SBA charges no fees under the program. Intermediaries may pay minimal third-party closing costs, such as filing and recording fees.

The SBA funds the lenders, and the lenders decide who gets a microloan.

What a Microloan Can Fund and Who Qualifies

The SBA’s program page lists working capital, inventory, supplies, furniture, fixtures, machinery and equipment as examples of uses. Proceeds cannot be used to pay existing debts or to purchase real estate.

Under 13 CFR 120.707, microloan proceeds may be used only for working capital and for acquiring materials, supplies, furniture, fixtures and equipment. The same paragraph allows borrowers to use proceeds to establish a nonprofit childcare business. The program page and the regulation word the list of uses differently, and only the program page names inventory and machinery.

The business must be an operating, for-profit business located in the United States. It must also meet SBA size standards and must not fall into an ineligible business type, according to the same page. Credit decisions rest with each intermediary, not with the SBA. The regulation also states that the SBA does not review Microloans for creditworthiness, so the lender’s own review determines whether an applicant is approved.

The regulation also bars a Microloan to a business whose Associate is currently incarcerated after a guilty adjudication. For childcare businesses, the same bar applies to an Associate on probation or parole for an offense against children.

The intermediary sets all terms for its microloans. Because lenders set their own loan terms, the requirements an applicant faces can differ from one nonprofit lender to another, even when the federal rules are the same.

What GAO Found About Microloan Borrowers, 2014 to 2018

The GAO review of borrower data cited here is GAO-20-49, released on 19 November 2019. It covered 2014 through 2018 and found that about 80 percent of microloans went to borrowers identifying as women-owned, veteran-owned, minority-owned or low-income. GAO gives that share as one combined figure rather than a separate number for each group.

The same report counted 168 nonprofit lenders in the program. Most participate in at least one other federal microlending activity. Of the 168, 122, or 73 percent, are also Community Development Financial Institutions. Those counts describe the lender network at the time of the review, and the number of intermediaries may have changed since then.

GAO reported that SBA does not clearly define low-income, so it may not be able to tell whether it serves low-income borrowers. GAO also found weaknesses in data collection and performance measurement, including deficiencies in how borrower business outcomes were recorded. As of August 2019, SBA had not taken appropriate advance planning steps for its new data reporting system.

The borrower-mix figure reported here covers 2014 to 2018 and combines four groups into one share. GAO lists all five of its recommendations as closed and implemented, with status updates dated between September 2023 and February 2024.