Advantages of an SBA MicroLoan

An SBA microloan from the U.S. Small Business Administration provides relatively small loans for start-up businesses or ongoing concerns. The major advantage of the SBA microloan is that it is intended for borrowers who might not meet the requirements for a traditional small business loan.

A Different Type of Lending

Obtaining financing for any start-up business can be a challenge. At a minimum, requirements to borrow include a good credit history, collateral to back the loan and  demonstrated expertise in the business. Even the traditional Small Business Administration loan program, typically called the 7(a) Loan Guarantee Program, has these requirements.

An SBA microloan is different. The program uses non-profit intermediaries in your area to funnel funds specifically targeting business borrowers who don't meet traditional loan standards. Put another way using industry lingo:  candidates for microloans typically are not "bankable."

What Is a Microloan?

The SBA microloan program offers loans of up to $35,000 to start-up, new or established businesses. The average SBA microloan is $13,000. The loans can be for a maximum of six years, but that time will vary based on the requirements of the intermediary lender. The interest rate on an SBA microloan typically ranges between 8 and 13 percent.

How Does This Progam Work?

In the SBA 7(a) Loan Guarantee Program the Small Business Administration guarantees a certain percentage of loans that banks make and administer. In the SBA Microloan Program, the SBA lends money to qualified, non-profit intermediary organizations in communities throughout the United States. These non-profit intermediaries, in turn, make SBA microloans locally.

This provides a tangible benefit to the business owner seeking an SBA microloan. Traditional lenders, such as banks, must put making a profit for their organization first. They have that duty to shareholders. But the non-profit intermediary making an SBA microloan has as its goal to find otherwise unbankable borrowers and help them start or expand a business. The SBA Microloan Progam is designed to help borrowers with low collateral, low credit score or limited experience.

Additional Benefits

A requirement to become an intermediary lender for the SBA Microloan Program is providing training and technical assistance to borrowers. Before you are deemed eligible to receive a SBA microloan, you must undergo training in business basics, loan repayment and business planning. Additionally, technical assistance is available in areas such as marketing. An SBA microloan comes with support to help you succeed.

Where to Apply

Though the standards are lower, you still must have a business plan, credit history and collateral to apply for an SBA microloan. The Small Business Administration office in every large community maintains a list of current, approved intermediary lenders. If you don't know how to make a business plan, have limited collateral or low credit scores, the intermediary lender will help you evaluate how to proceed with your application and address possible deficiencies.