What are Microloans and How They can Help Small Businesses

In the year 1992 the SBA developed a special loan program called the Microloan Program. With this program, SBA facilitates the small business owners to borrow nominal amounts to meet their business expenditure. Five years later, in 1997, this program achieved a permanent status. In fact, this loan is ideal for meeting expenditures associated with inventory, machinery and equipment, furniture and supplies, and other working capital. With the Microloan Program nonprofit intermediaries can provide loans to existing as well as new borrowers. The minimum amount that one can borrow is $100 and the maximum limit is $35,000. The average loan maturity tenure is around 42 months and the maximum term is six years. Presently, there are around 170 nonprofit organizations that provide such loans. Be it a dyes and chemicals firm or a garment manufacturing company, this loan is a great option for the start up businesses as they have lower capital requirements.

As said earlier, this loan is ideal for startup companies as their capital requirements is usually lower than those who are already functioning in the market. Since these startup companies have limited operating history, the nonprofit intermediaries also help them at times with their expertise in business. It is a great option for those entrepreneurs who have never borrowed from any bank or other financial institutions. Moreover, you can negotiate the interest rates with the intermediary. However, the rates are usually higher than most of the standard business loans. Some of these loans also requires personal guarantees and are collateralized by contracts, equipment, inventory and other property. Another drawback of such loans is the level of difficulties in obtaining them. The distribution system of these  nonprofit intermediary is usually centered in their own communities and regions. Thereby, if your business is located within such a region, it will become quite difficult to obtain the SBA microloan funds. But again there are some other alternative microloan programs offered by state and local governments, that you can refer to in such a situation.

The application process of Microloan Program is quite simple. Forst and foremost, you need to find out those nonprofit intermediaries that offer these kinds of loans in your area. The next step is to contact them and tell them about your requirements. During your initial conversation, the intermediary is likely to ask you a few basic questions. They will ask questions like whether you need the loan for your existing business or for starting up one. In addition, you need to give the exact figure that you need as well as your purpose for borrowing the money. Some of the intermediaries also need information about your management team and their total experience. Apart from all these information, you have give them details about the amount that you have already invested or are willing to invest (in case of startup businesses) and the available collateral. Based on these information, the intermediary will send the applications.

Though sharing your business plans is not necessary, you must have a good understanding about your capabilities, market and target audience and your competitors. Those who are taking such loans for  existing business, need to provide previous financial statements. And for startups, you will have to submit your personal tax returns.