A Simple Guide to Microloans
What it is: The Small Business Administration established a Microloan Program in 1992 to increase the availability of very small loans to small-business borrowers. The program had doled out thousands of loans to businesses. Money has gone toward a wide range of uses: working capital, inventory, supplies, furniture, fixtures, machinery and equipment.
Loans can reach to up to $50,000, with an average microloan of about $13,000.
How to get it: Microloans are available through nonprofit community-based organizations that serve as intermediaries. There are about 200 across the United States.
A full list is available on the SBA’s website.
Here are ways to prepare for applying for a microloan:
- Have a business plan.
- Make sure you will be able to make the monthly payments.
- It’s often best to stick with microlenders in your own area.
- Show a readiness to invest some of your own money in the business.
Upside: Microloans are an especially good source of funds for businesses that have never borrowed from a bank. The program provides a source of smaller loans that many banks are reluctant to service, especially as a business loan.
The loans can be best for startup companies with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary's expertise in business.
Downside: Microloan interest rates tend to be higher than for standard small business loans.
SBA microloan funding can also be difficult to get if your community does not have a nonprofit serving as an intermediary for the program.
Lending and credit requirements vary among intermediary lenders. Often, some type of collateral or personal guarantee is required in order for a business owner to obtain a loan.
Microloans can pay for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment.
If your business doesn't qualify for an SBA-funded microloan, there might be other local microloan programs that can offer an alternative. When it comes to finding one, asking around might be the best strategy.
Related: Launch Your Startup With Microloans