How Do Microloans Work?

If you are a start-up or newly established business, you may find that a business loan may be challenging to obtain, especially if you have less than perfect personal credit. The Microloan Program was established to meet the financial needs of start-ups, newly established and growing businesses, and even some not-for-profit childcare centers, by offering very small loans that can be used to cater for certain expenses. What happens is that the Small Business Administration (SBA) provides funds to nonprofit community based lenders (micro lender intermediaries) who in turn make these loans available to eligible borrowers. The maximum amount of loan that can be borrowed is $50,000, although the average loan amount is usually $13,000.

If you wish to obtain a loan under the microloan program, you will have to first speak to the intermediary lender in your community. This is because the intermediary lenders have differing lending and credit requirements. It is important to note that usually, intermediaries will require that you provide collateral. A personal guarantee of the business owner is also required.

For these microloans, the maximum term usually allowed is six years. However, the terms of the loan do vary depending on the size of the loan, the planned use of the funds, the intermediary lender’s requirements and also the needs of the small business borrower. The interest rates also differ, and they depend on the intermediary lender and the costs that have been passed on to the lender by the U.S. Department of the Treasury.

If you are a small business owner and wish to obtain microloan financing, the first thing you should do is contact an intermediary micro-lender located in your area. If you meet the requirements of the micro lender, you may seek approval for a loan which you can use for your small business or start-up. The micro-lender will, besides making a loan available to your business, offer technical assistance where needed. It is important to note that even though the loans are provided by the SBA through the micro-lender, it is the micro-lender, and not SBA, that makes all the credit decisions. As such, any negotiations should be made with the micro-lender.

Start-ups and small businesses are not easy to start or run. If your business has been held back by business capital limitations and financing challenges, the microloan program is a great place to start for business owners seeking financial assistance. If you are seeking a larger loan amount than the microloan lender is able to provide or if you need immediate financial assistance, you may want to consider working capital loan financing from a top-rated alternative lender.