If you are looking for a little cash to jump-start or expand your business – and rich Auntie Lorie has already closed her doors on you – then you might want to look into a microloan program.
The Small Business Administration (SBA) introduced its Microloan Program in 1992 to provide for startup or growing small businesses. Under the program, qualified borrowers may be approved for loans for use as working capital, inventory purchase, procurement of supply, fixtures, machinery and equipment. The loans are distributed through non-profit community-based lenders or intermediaries, and not at SBA directly.
RELATED: How to Get an SBA Loan
What’s the catch?
First, microloan amounts are small.
Microloan amounts may range from $1,000 to $35,000 (sometimes less, depending on the maximum amount set by the loan intermediary) – just the right amount for less capital-intensive home businesses. The average loan amount is $10,500. Businesses that require extensive capitalization like building or land procurement may find the amounts offered by the Microloan Program too small and limiting. The maximum lending term for a microloan is 6 years.
Second, there are eligibility requirements.
If you think Microloan Programs are less strict than a bank, think again. While each intermediary sets their own criteria for loan eligibility, the general requirements include some type of collateral, and the personal guarantee of the business owner. The collateral may include equipment, contracts, inventory or other property.
RELATED: How to Get an SBA Loan
The basic questions often asked by the loan providers include:
- Is this a start-up or existing business?
- How much money is needed, and for what purpose are the funds intended?
- Who is included in the management team, and what is their experience?
- What collateral is available?
- How much have you already invested or are you willing to invest?
Unlike a bank, however, most intermediaries do not require business plans; but borrowers must be able to display an understanding of the business and its current marketplace. For new business owners, personal tax returns are required while intermediaries look for previous financial statements for existing businesses.
Third, it’s not free money.
The microloan needs to be paid – at a given interest rate decided by the loan intermediary. According to the SBA, interest rates vary, “depending upon the intermediary lender and costs to the intermediary from the U.S. Treasury.” The interest rates are negotiable with intermediary, but tend to be higher than for standard business loans.
The microloan is a good source of funds for businesses that have never borrowed from a bank, or those that require smaller amounts that banks typically do not provide as a business loan. Plus, a borrower is entitled to receive business-based training and technical assistance, sometimes as a requirement prior to the loan approval.
However, SBA microloan financing is difficult to get if there are no non-profit intermediaries residing in your area. If such is the case, an alternative is to seek microloan programs offered by states and local governments.
Recommended Books on How to Finance a Small Business:
- The SBA Loan Book: The Complete Guide to Getting Financial Help Through the Small Business Administration
- Financing Your Small Business: From SBA Loans and Credit Cards to Common Stock and Partnership Interests (Quick Start Your Business)
- How to Get a Business Loan
- Unlimited Business Financing: Learn How To Obtain $250,000 Or More In Business Funding Without Harming Your Personal Credit