Posted in Entrepreneurial Funding Blog Posts

SBA Microloan Programs

If you plan to start fairly small in your small business, but still require capital, the Small Business Administration Microloan may be a good option. The SBA provides funds to a designated intermediary lender, which administers the loan on behalf of the federal agency. Microloans slightly differ from the SBA general business 7(a) loans. The application may also require an entrepreneur to complete an educational training component to qualify. Microloans are especially useful for those who need to clean up their finances, in economically disadvantaged areas, and need to grow a business.

The Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000 (SBA.gov). Typically Microloans are a lot more popular with small business owners because it allows them to get the capital they need without such a lengthy application process. Much like the 7(a), money cannot be used to pay any existing debt an owner has incurred. Proceeds can be utilized for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment.

Intermediary lenders are non-profits, banks, credit unions, or private lenders. Interest rates and repayment terms depend on the loan amount, use of funds, terms of the financial entity, and needs of the small business owner. However, interest rates range eight to thirteen percent. The SBA’s maximum Microloan term is six years. You’ll get solid loan terms from these lenders, making it possible for you to grow your business and establish better credit. That can help you qualify for other types of financing down the road (Pimentel, 2017).

Microloans also differ from 7(a) in the length of the application and do not have as many requirements. Though, some microlenders do require collateral and a personal guarantee from the small business owner. Depending on the lender there may also be an educational training component that will need to be fulfilled to be considered for lending. Seeking help and assessment from an approved Small Business Center will be your best option when applying for this particular loan.

There are many advantages to using this loan program. However, it does not come without its disadvantages. Advantages being it is a lot easier to qualify especially if an owner has not already secured funding for operations. However, “The [disadvantage] of the microloan is the “micro” part: Funding may not be sufficient for all borrowers.” (Pimentel, 2017) If an owner has a spike in business and needs additional funds that the loan is not provisioned to cover an owner can take a loss because they are not able to handle the demand. Nevertheless, I still believe microlending is still a good option to initially pursue because ultimately the good outweighs the bad.

Sources:

Microloan Programs (2017, September 21st) SBA Loans & Grants retrieved via https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program

Pimentel, B. (2017, July 19th) How to Start a Business: Where to Find Startup Business Loans 2017 Retrieved via https://www.nerdwallet.com/blog/small-business/start-up-business-loans-for-bad-credit/

9 thoughts on “SBA Microloan Programs

  1. A nice summary of the microloan program which I hadn’t been aware of. I think your a point that this would be an excellent way to improve one’s credit is excellent. Folks often forget that one of the best ways to raise your credit score is to actually take out a loan and repay it promptly and quickly. Successful and on-time payments demonstrate to others that you are able to handle credit and meet your obligations. And it sounds like these kind of loans would be an excellent way to accomplish that goal.

  2. Hello Tosh,
    Microloan Programs is something I did not know much about and is interesting to see. I could see where this might help many. I am curious the percentage of the micro loans vs the SBA loans which one has the higher rate of success in being paid back in full with live functioning businesses?
    Mary

    1. Mary,
      Microloans have a higher interest rate. It ranges between 8% to 13%, whereas, SBA 7(a) loans have interest rates as low as 6.5%. Of course, 7(a) offers more capital thus receiving more in return on investment in overall interest.

  3. Hi Tosh,
    Is the reason the interest rate is higher because of the borrower’s bad credit rating? I can understand that. It’s hard to understand why they would have higher interest rates for someone with a good credit score trying to create a business in a disadvantaged area.
    Cece

  4. Tosh,

    These microloans sound like a great idea if you are in need of some funds for your small business. This sounds like a great alternative to credit cards, I am glad to know that these options are available for small business owners. I would rather take a small loan that is easy to pay off than get investors involved or shareholders. Thank you for this great information.

    Thanks,
    Mackensie

  5. Great informative post! The SBA.gov is a great source to utilize if you need a small business loan. A reason to get it might be to purchase an extra piece of equipment once the business has started up.

  6. Hi Tosh,
    This is seems to be a good loan; especially for start -up cost as you mentioned: supplies, furniture etc. Interest rates are kind of high – but this would be a great options to keep in mind.
    Thanks for sharing – enjoyed

  7. Hi Toshia,
    The Microloan program is a new one for me. I was involved with a business which had an SBA loan a long time ago. I remember the process to be quite lengthy and full of paperwork. I understand from your post that Microloan program may have changed some of those requirements. Those improvements may be great thing for entrepreneurs!

  8. Tosh,
    It seems like I can always count on you to provide a high level of detail and useful information in your blog posts. This was full of great information that I will be looking into further in the coming days and months. The micro loan program is something I would like to become more knowledgable about.

    Austin

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