Disadvantages of a SBA MicroLoan

SBA Micro Loans allow many small businesses to get relatively small amounts of capital for a small business regardless of a lack of earnings history, lack of experience or lack of significant collateral. These loans are designed to help businesses that are relatively cash starved get started. SBA Micro Loans are fast becoming a very popular financing method for many small businesses. However, before you rush out to apply for an SBA micro-loan, there are some things that you should consider.

Disadvantages of SBA Micro Loans

While the maximum amount available under an SBA micro-loan program is $35,000, the average Micro Loan, that is approved, usually only amounts to about $13,000. It may be that $13,000 is sufficient for your business financing needs; however, $13,000 generally will not go too far in many small businesses today. Therefore, for many types of large capital purchases you may be better off pursuing a different type of financing in order to obtain larger financing amounts.

Some Collateral Will Be Required

Also to be considered is the fact that almost all SBA Micro Loan lenders will require some form of collateral against the possibility of your loan becoming delinquent or placed in the default. Although the collateral requirements are usually less significant than they would be with a larger, commercial loan, it is very unlikely that you will be approved for the loan without any collateral at all.

Misuse of Micro Loan Proceeds

SBA Micro Loans were designed to assist small business owners with the capital investment in their business. However, an increasing number of small business owners are using the proceeds from SBA Micro Loans for the everyday operating expenses involved in running their businesses. Therefore, many small businesses find themselves entering an almost endless cycle that requires that they always take out another business loan to pay off the debt incurred from a previous business loan.

So, if you are thinking of applying for an SBA Micro Loan, you should carefully consider whether the loan proceeds will actually increase your ability to expand or grow your small business or whether you are simply attempting to use the loan as a stop gap measure to pay off other debts.