In 1992, the United States Small Business Administration created the Microloan Program to foster growth in the small-business community. Since its inception, the program has helped many entrepreneurs who might not have otherwise been able to acquire startup capital to do so. Microloans are one option among many in the business finance marketplace. Is a microloan right for your small business?
How Microloans Work
The SBA does not actually lend money to business borrowers. Their role in the microloan program is to guarantee a portion of the debt, making it less risky for lenders to make loans to entrepreneurs with limited business credit history.
The proceeds of a microloan may be used for many different purposes, including shoring up operating capital, purchasing inventory or raw materials, buying business machines or manufacturing equipment, and purchasing furniture or fixtures.
As the name implies, microloans are small, compared to most traditional business loans. The average microloan is about $13,000, though microloans for as much as $50,000 are possible.
How to Get a Microloan
In order to qualify for an SBA microloan, small-business owners must apply through an intermediary lender, a community-based non-profit organization dedicated to servicing microloan borrowers and providing management training and technical assistance.
Microloan applicants should be prepared to show lenders a thorough business plan, and if the business is already in operation, financial records showing its past performance. Microloans typically require personal guarantees, as well, so prospective borrowers should do what they can to improve their business credit ratings before applying, and prepare documentation that proves their ability to repay the loan.
Is a Microloan Right for Your Business?
Microloans can be an ideal financing vehicle in certain situations. They are particularly well-suited for business borrowers with limited business credit history, first-time entrepreneurs, and newly minted businesspeople who are seeking capital for the development or expansion of small businesses. In addition to providing business funding, microlenders can be a valuable source of information for those with little business experience. Microloans are also a smart choice for situations in which an influx of capital is needed, but the amount is less than traditional lenders are interested in lending.
While the interest rates on microloans tend to be higher than those offered on traditional business loans, the cost is much lower than what it would be if the business was financed using credit cards. Because loan amounts are typically relatively small, microloans are ideal for budding entrepreneurs, as even if the business fails, they will not be permanently financially ruined.
Photo Credit: Joe Duty, Flickr.