The Small Business Administration (SBA) Microloan Program is used by small businesses and local entrepreneurs as well as non-profit child care centers for working capital needs, the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment.
This program, in particular, supports under-served or un-banked markets, including borrowers with minimal credit history, low-income borrowers, and women and minority business owners or entrepreneurs who do not qualify for conventional bank loans or other SBA loan programs.
SBA microloans cannot be used to pay back existing debt or to purchase real estate. The microloan program is a short-term loan program that assists with immediate cash flow needs. The maximum loan amount is $35,000 and the average loan amount is approximately $13,000. According to the SBA website, in the last fiscal year, the average microloan size was $11,600.
The maximum term allowed for a microloan is six years. However, the terms vary according to the size of the loan, the planned use of funds, the requirements of the micro lender, and the needs of the small business borrower.
Interest rates on microloans vary, depending on the microlender and the costs of SBA funds from the U.S. Treasury. Usually, rates range from 8% to 13% and are negotiated between the borrower and the microlender.
SBA microloans are made through designated intermediary lenders which are non-profit community based organizations (CBO’s) with experience in providing technical assistance and loans to small businesses.
The SBA’s role in this program is that of guarantor; the SBA itself does not make loans. Rather, funds are made available through CBO’s. By acting as a guarantor, the SBA is reducing the risk to the lender thereby facilitating many more small business loans.
The American Recovery and Reinvestment Act allowed the SBA to finance up to $50 million in new lending and provided an additional $24 million in technical assistance grants to microlenders through September 2010. Each intermediary lender has its own lending and credit requirements.
Generally, intermediaries require some type of collateral and/or the personal guarantee of the business owner. CBO’s will often accept collateral that banks typically refuse, such as contracts, supplies, etc.
Microlenders are required to provide each borrower with business-based training and technical assistance. Each microloan borrower may be required to fulfill training and/or planning requirements before a loan application is considered. Additionally, there are often requirements for continuing training after the loan is closed. To maximize chances for success, borrowers must participate in training, classroom or one-to-one counseling and other forms of technical assistance.
Before applying for a microloan it is recommended that the small business owner develop a business plan. It would also be beneficial if the business had some operating history and financial statements, but that is not a prerequisite.
There are presently about 165 agencies that participate in the SBA Microloan program. The SBA has published a Directory of Microloan participants, which can be downloaded for free. It lists all participating agencies, broken down by state.
In an economy where credit is tight, the Microloan program can provide small businesses with the technical assistance and cash flow needed to operate as going concerns and grow their businesses.
Published or updated April 5, 2013.