What You Need to Know About Small Business Microloans

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Microloans are small business loans that are usually offered for up to $35,000. However, some lenders will allow microloans up to $50,000. Microloans are generally used for start-up cash but are sometimes given to newly launched small businesses for working capital.

Microloans can be used for many purposes including the purchase of equipment, inventory, machinery, fixtures, furniture, supplies, and even to purchase another business.

Does the SBA Give out Microloans?

No. The Small Business Administration (SBA) does not lend money to businesses or individuals. However, the SBA does have many programs that help small businesses apply for loans and other business support. The SBA does provide funding to certain nonprofit community lenders, and these lenders then make microloans to small businesses, usually within their communities.

What Are the General Terms?

Each microlender will have their requirements for repayment of a microloan. In general, the maximum term for microloans is six years, but interest rates and collateral requirements vary considerably between microlenders.

Most microlenders require a personal guarantee by at least one of the business' owners.

At one time, microloans were relatively easy to obtain compared to traditional bank loans. However, with the downturn that happened to the United States economy in 2008, microloans can be more difficult to get now.

Microloans obtained through SBA-backed or other related programs typically require the applicant to fulfill certain business training and planning requirements (which vary) before a business owner can submit an application for a microloan.

Where Can I Find an SBA-Partnered Microlender?

You can find SBA-partnered microlenders throughout the United States (currently 46 states have SBA-partnered microlenders) as well as the District of Columbia and Puerto Rico. You can find a list of microlenders in your state on the SBA's website.

Are There Other Lenders Not Associated With the SBA That Make Microloans?

Yes. Here are a few places to check into:

  • Kiva: A website that facilitates person-to-person microloans to entrepreneurs in other countries. Kiva allows you to lend as little as $25 to help individuals start small businesses in other countries. To date, Kiva donors have lent more than 7.7 million dollars to small businesses.
  • Opportunity Fund: Nonprofit microlender that offers a variety of microloans and small business loans that can be used for working capital, equipment purchases, remodeling, and other business development expenses.
  • Accion USA: For existing businesses, Accion loans range from $500 to $50,000. These loans are commonly granted to be used for things like working capital, operating costs, vehicle purchase, inventory purchase, equipment purchase, location changes, and marketing.

Local economic development organizations also make microloans to local community members. Call your local municipality or chamber of commerce and ask for information about microlenders in your area.

Is It Hard to Qualify for a Microloan?

Your ability to qualify for any loan depends on your unique financial situation and credit rating and the individual qualification requirements of different lenders. However, there are some things you can do to improve your chances of being approved for a business loan.

If you are applying for any type of business loan, have a professional quality business plan.

Be prepared to be asked about your experience in business and your ability to start and run a successful business. You may be asked about your education, special skills, and professional experience and credentials that can help reassure the lender that you know what you are doing.

You should also be prepared to show what you have already invested in the business personally. Investors may believe more in your business idea if you have already shown a willingness to sacrifice to make your dreams come true.

Bring financial data with you to the lender including budgets, a balance sheet, and any other documentation you have to show past performance and current assets.

Can I Use a Microloan for Any Business Purpose?

No. Lenders will want to know exactly what you plan to do with the loan and usually place restrictions on what you can use the money for. Be sure to ask any questions you may have about what you can borrow money for and how much you can borrow before you submit a formal application.

Show that you have done your homework and that you can be trusted and you may just get the loan you need to start the business of your dreams.