Definition or Explanation: The Microloan Program was developed by the SBA in 1992 to increase the availability of very small loans to small-business borrowers. It achieved permanent status in 1997. The program uses nonprofit intermediaries to make loans to new and existing borrowers, and since 1992 has accounted for more than 12,500 loans totaling more than $112 million.
Appropriate For: These funds may be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment.
Supply: Microloans are available from private, nonprofit intermediaries. Currently, the program is administered by 170 nonprofit organizations serving their communities in nearly every state, plus Washington, DC. According to the SBA, there is a sufficient supply of funds due in part to a self-sustaining revolving fund (as loans are repaid, the agency extends those funds to other qualifying businesses).
Best Use: For startup companies with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary’s expertise in business.
Cost: Negotiable with intermediary, but rates tend to be higher than for standard business loans. Most loans are collateralized by equipment, contracts, inventory or other property and require personal guarantees.
Ease of Acquisition: This is an especially good source of funds for businesses that have never borrowed from a bank. And it provides a source of smaller loans that many banks are reluctant to service, especially as a business loan. One of the difficulties in obtaining microloan funding, however, lies in the nonprofit intermediary distribution system. These intermediaries distribute funds in their own communities and/or regions, so if one does not exist in your area, SBA microloan financing may be difficult to get. If this is the case, however, there are other microloan programs—often backed by state and local governments—that can offer an alternative.
Range of Funds Typically Available:Less than $100 to a maximum of $35,000. Average loan size is $10,500, with an average loan maturity of 42 months. The maximum term for this type of loan is six years.
Self-Help, a nonprofit commercial development financial institution, is one of the nation’s most active SBA microloan lenders, and Millard Owens, former director of microlending, has been involved in many of these loans. He says that the process of applying for the loan can be made easier by understanding what is involved, and describes what happens when a potential microloan borrower initiates the loan process at his organization.
During the first call, a Self-Help staff member takes the time to gather preliminary information. In this initial conversation, the borrower is asked a number of basic questions, including:
- Is this a startup or existing business?
- How much money is needed, and for what purpose are the funds intended?
- Who is included in the management team, and what is their experience?
- What collateral is available?
- How much have you already invested or are you willing to invest?Following this preliminary information-gathering call, applications are sent via mail, along with a form from which applicants are asked to develop a personal financial statement.
Business plans are not required at all levels, according to Owens, but borrowers must have a complete understanding of their market, capacity and competition. Previous financial statements are required for existing businesses, but in the case of startups, personal tax returns are often substituted.
Once this data is reviewed, Self-Help contacts the applicant by phone, usually within a few days.
During this period, Self-Help adds a credit report to the information supplied by the applicant. Often, Owens notes, the application is incomplete and requires additional information. It is generally the tax returns that are among the missing pieces.
The best advice, especially if you’re in a hurry, is to supply all requested information and, almost as important, make it as clear as possible in terms of its presentation. In other words, if the lender can’t read it, it may as well not be included.
From there, if the loan request is small—that is, $5,000 and less—the process can be completed in a few days. Larger amounts take longer—generally, two to four weeks—because additional information is required.
In summary, the Microloan Program can offer a cash and credit jump-start to small or start-up businesses. Unlike many of their counterparts, these lenders are comfortable with the needs, collateral and experience level of small borrowers and are flexible in their dealings with this important segment of the economy.