Entrepreneur Insight

SBA Microloans: Small, Easy and Flexible Funding

How a low-cost small business loan can jumpstart your business

“I had to fund my own way through college, law school and a master’s program,” says Mercedes Castillo, an attorney and owner of Castillo Immigration Law, PC. “My school loans really affected my overall credit score, and I had consistently been denied at other traditional banks. I felt like I couldn’t get the support I needed to get my business loan approved.”

But what if you could get a loan that was more forgiving, that didn’t involve large sums of money or steep interest rates? Perhaps you’re just looking to have more working capital for your business, or you need some extra cash to buy new inventory. Whatever the reason, an SBA microloan could help address your specific needs.

“SBA microloans can be used for many different things,” says Jezabel Jimenez, assistant vice president and lending officer for small business at East West Bank. “Whether you’re launching your business or expanding it, an SBA microloan gives you the freedom to work and create the business idea you have and turn it into reality.”

Offering loans of $50,000 or less to small businesses, the SBA microloan program is attractive because of its flexible terms, rates and eligibility requirements. Many of the lending parameters for microloans are set by the intermediary organization. According to the U.S. Small Business Administration (SBA), the average microloan amount in the U.S. is about $13,000.

“Unfortunately, not many business owners know about the option of taking out an SBA microloan,” says Namoch Sokhom, director of business development at the Pacific Asian Consortium in Employment (PACE LA). “Given that the SBA microloan program has very limited funding nationwide, we especially don’t have big advertising budgets that many private, online or fintech firms might have.”

How it works

“We look at a business like we would an individual,” says Jimenez. “Every business is different, with different visions for the end goal, industry markets and clients served, so the amount for what they can apply varies. It could be $25,000 or even $150,000—it depends on the business' needs.”

Sokhom and his team at PACE LA gave out 30 loans to small businesses in 2018. “We had one landscaper who came in and became our client. His business was almost bankrupt when he came to us because he had taken out a $50,000 loan online that had a very high interest rate,” says Sokhom. “He was paying $350 every single day. Many small business owners need help fine-tuning their calculations to understand how to make their bottom line grow. Had this business owner realized that he would essentially be paying about $10,000 a month just to repay the debt, I’m sure he would have had second thoughts about borrowing from that lender.”

“What I really like about the SBA program is that if you’re a small business and you’re coming to a bank like East West Bank, you’re playing with the big leagues,” says Jimenez. “What I mean by this is, you may need just a small amount of money, but you’re with a big team that is very experienced to help launch and assist in making your business successful.”

Taking out an SBA microloan has given Castillo’s law firm more access to capital. “We started our small business in 2010, and with the SBA microloans, we’ve been able to use the funds for advertising and marketing, for making purchases on equipment that we need, and for investing in our practice,” she says.

How to prepare for a microloan

“Who can qualify for an SBA microloan? We get that question a lot,” says Jimenez, “and a lot of people are confused and intimidated, for the most part, about microloans.” The most basic requirements include being a for-profit business that’s operating in the U.S. and the business owners being U.S. citizens or legal residents.

According to Sokhom, many business owners seeking a microloan are getting one for the first time. “We tell every new business owner that even if they may not be thinking about getting a microloan right now, they should still be prepared for when that time might come,” he says. “And by getting ready, I mean not going out and spending extravagantly during the first few years of your business. Don’t go into debt or sign up for another credit card before applying, because you want to make sure your credit score is at 650 or higher.”

While each intermediary SBA microloan lender has its own lending and credit requirements, the general rule of thumb is to show that your business has collateral and some sort of guarantee for success. “Businesses that can qualify for these types of loans include restaurants, retail shops, manufacturers…any business that you can actually think of could potentially qualify if they have the right payment history and vision behind it,” says Jimenez.

As a business owner, how knowledgeable are you of your market and financial needs to stay competitive? “As a lender, I always want to know exactly how much my client needs,” says Sokhom. “Have that answer ready and be prepared to show your reasoning behind those numbers.” If you are looking to purchase new equipment, it’s imperative to show that you’ve compared different products across markets, researched what types of equipment competitors are using, and can demonstrate how this equipment will translate into a stronger bottom line. “We need to see that you’ve taken the time to answer these questions on your own before we’re comfortable lending, because even after we’ve given the money away, we want to be reassured that the money is being spent smartly,” says Sokhom.

Online tools such as Quora and BuzzSumo allow businesses to find the most shared content on a topic, and social media sites provide a closer lens into consumer demand and competitor strategies. “Even if you’re a brand-new business owner, say, in this case a restaurant,” says Sokhom, “we’d rather you come in and say, ‘Hey, I’m new to the market, but I’m estimating that I need X amount of customers to eat at my restaurant per day with this menu price listing to make X amount of money to turn a profit.’ That at least indicates to us that you’ve done your research and calculations.”

Real-world example

While lofty “how-to” instructions are useful, they serve as a guideline, and business owners should speak to an expert and network with other business owners with microloan success stories.

Jimenez was also able to help her local pet store called Purrrfect Paws Grooming to physically expand and fill their store. “I actually started taking my puppy to their shop and noticed that they were expanding,” says Jimenez. “I was curious about where they got the money and asked Ana, the store owner, about it, and she said they used their own savings to expand their business. I sat down with her and explained that the money she earns is money that she needs to reinvest into something greater. Why put your hard-earned money into something when a bank can help with the costs?” After securing a working capital loan with East West Bank, Purrrfect Paws was able to secure more space, merchandise, and equipment, and take in double the amount of customers.

“If we didn’t get that loan, we probably never would have expanded, it would have taken us a long time,” says Jessica Tobar, the owner’s daughter and store manager.

“Mercedes is our superstar client,” says Sokhom, “with a long history as a community attorney who did a lot of pro bono work. Mercedes decided to start her own law firm and came to us to borrow $10,000 to cover expenses for a new copy machine and other computer equipment.” Since’s Castillo’s firm specializes in immigration law and provides low-cost consultations in East Los Angeles, they grew exponentially after President Obama implemented the Deferred Action for Childhood Arrivals (DACA) policy in 2012.

“In the beginning, Mercedes’ firm was making about $60,000 in annual revenue,” says Sokhom. “When she came back to us in 2017 for another $25,000 microloan, she had already hired three more staff members and expanded her office.” In 2018, her firm claimed an annual revenue of $265,000.

“We have grown over the years to be able to assist more immigrants and others in the community,” says Castillo. “We now have two full-time attorneys and a staff of about five paralegals, four interns and volunteers. We started with a small office in East Los Angeles and now have another satellite office in San Bernardino. With our most recent SBA loan, we’re hoping to invest in our marketing, tech infrastructure and overall growth into our markets.”

Ways to raise credit scores and other preparation advice

For business owners who may be struggling with low credit scores, there is an even smaller loan option called mini-microloans that can help raise scores. “Many of the people who come to us have already ruined their credit by either borrowing too much or charging too much on credit cards,” says Sokhom. “To try and restore their credit, we make a small loan of, say, about $1,000. Once they’ve paid that mini-microloan off to us, they can then use that amount as a deposit for a secure credit card with a low credit limit of, say, $2,000. We teach them to keep spending below 30 percent of the credit limit and pay off the card every month on time. In six months, if the client follows our prescription, they’ll be able to increase their credit score by about 30 to 60 points.”

The biggest advice that Sokhom has for business owners with bad credit is to first separate business transactions from all personal accounts. “Put everything through a checking account or a credit card and avoid cash transactions, especially on expenses,” says Sokhom. “Make sure all your transactions reflect actual business activities, so that when things pick up and you’re ready to grow, you have all this data to back up your request for a larger loan.” The emphasis should consistently be on monitoring cash flow and keeping things on record. “Don’t do anything that could stifle your growth, and if you’re ever unsure of which step to take, we’re here. We’re in the business of advising businesses to grow.”

“Whether you’re launching your business or expanding it, an SBA microloan gives you the freedom to work and create the business idea you have and turn it into reality.”

-Jezabel Jimenez

Attorney Mercedes Castillo helping a client at her desk

A full-blown business plan is typically not necessary when applying for an SBA microloan. However, demonstrating that you are a responsible business owner who has taken careful consideration of extenuating circumstances and financial needs can go a long way. “Some of the elements we look for when a client applies is their cash flow history, profit and loss analyses, tax returns, credit history, and whether or not they have a business plan and vision,” says Jimenez. “Have all of your documents in order. Whether that’s taxes or your business license, just make sure you have everything in order. Then sit down with an SBA specialist and have questions ready. Research very carefully who you want to establish your business with, because it’s not just going to be about one loan. It’s going to be about your business expansion, that second loan and ways to further support your business to grow.”

Learn more about how SBA loans can help your business grow