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.
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/