The Small Business Administration (SBA) defines a microloan as any loan of $50,000 or less. Because the requirements for a microloan can be much less strict than more traditional loans, these are often considered an ideal solution for those with little credit, or even those who may be considered a credit risk.
Often a microlender is considered as a “last resort,” but that’s not always the case. Many banks, angel investors and others who offer microloans do so on a regular basis as a means of assisting small local businesses.
Technically, a microloan is under $50,000 but some mircolenders actually offer larger loans, even twice as much, depending on the lender’s policy. Not all microloans are backed by the SBA so it’s up to the lending agency to determine their limits.
Unlike traditional bank loans, microloan interest rates typically run 8 to 13 percent and are usually limited to a 6 year term. Such loans can be used for equipment, furniture, supplies and working capital. They cannot be used for buying real estate or paying off existing debt.
While microloans are usually issued by SBA-backed lenders who are vetted and evaluated, that doesn’t necessarily make them a safer venture. If you’re considering a microloan, experts who are experienced in dealing with this type of loan and who understand the SBA’s administration policies for them recommend finding a lender who will guide you through the application process, which can be challenging.
In addition, many microlending organizations offer business training and counsel to those who may be new to starting and running a small business. This can be invaluable for a new start-up. Think of having a business mentor looking over your shoulder and offering advice for each step of the way. That’s a service that many microloans include at no added charge.
Before considering a microloan for your business, take stock of what you bring to the table. Create a solid business plan outlining your strengths, weaknesses, goals and financial aspirations for your company and how you plan to reach them.
Unlike other loans where the only thing that really matters is your credit score, a microloan is often as much about selling yourself and your enthusiasm for your new business as proving you can pay back the loan on time.
