A Quick Guide to Microloans
by JamieD, Former Moderator
- Created: June 30, 2009, 12:13 pm
Money money money...these days, it's all about the money. Who's got it, where can you get it, how can you get it, and how to spend it? Well if you're a small business and are looking for just a small amount of money, a microloan might be just what you're looking for. Designed to provide more loans to small businesses, microloans have made small amounts of capital more readily available. Since conception, the microloan program has awarded over $112 million in more than 12,500 loans.
What is the Microloan Program?
The Small Business Administration began development of the Microloan Program in 1992. Its goal of increasing the availability of loans to small-business borrowers is achieved through the use of private, non-profit intermediaries. These intermediaries provide new and existing borrowers with very small loans. They are comfortable with the background and needs of small borrowers and provide loan amounts that larger loan programs would generally not be interested in. They have propelled the program's success and enabled it to receive permanent status in 1997.
Who can get a microloan?
Microloans are intended for small businesses and pretty much all small businesses are eligible. They are most beneficial to businesses with minimal capital requirements and should be used in that manner. While the program cannot help everyone that applies, it is designed to accommodate as many borrowers as possible. As a self-sustaining revolving fund, it to pays new borrowers with repaid money from old borrowers and continues to maintain a sufficient supply of funds to be distributed.
What problems might I have in getting a microloan?
Although the program does not have strict eligibility requirements, location can be a factor in your ability to get a loan. Intermediaries are not located everywhere and generally distribute loan funds within their own areas. If you are not operating in one of these regions, you are likely to have a difficult time getting a loan. In these cases, businesses should look to their state and local governments for the availability of other microloan programs.
How should microloan funding be used?
Businesses can spend their funding in many different ways. Working capital, inventory, supplies, furniture, machinery, and equipment are all appropriate uses of microloan funds. Intended use will be discussed with your intermediary and will often influence the terms of your loan.
How much money can I expect from a microloan?
Loan amounts vary a great deal and can be awarded in very small amounts or a maximum of $35,000. According to SBA, the average microloan is about $13,000.
How much will it cost in terms of interest rates and fees?
Microloan terms are available for a maximum of 6 years but vary depending on size, intended use, intermediary requirements, and the needs of the small business borrower. Interest rates also vary but generally average between 8% and 13%. Most intermediaries also require some sort of collateral and the owner's personal guaranty before approving a loan.
How can I apply for a microloan?
Microloan applications should be filed through the applicant's local microlender. Microlenders are located in Puerto Rico and all states except Alaska, Rhode Island, Utah, and West Virginia. Portions of the states without lenders are currently being serviced by outside providers and should be looked into on a case by case basis. For more information view SBA's microloan program forms and documents.
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