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.
What’s the catch?
First, the loan 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
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.
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
- Who is included in the management team, and what is their
- 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.
Click here for a list of SBA participating intermediary lenders per state
(check the coverage area of each lender):
Edited March 2009