We’ll discuss what microloans are, give examples of how they work, and explain details of the SBA’s Microloan Program.
Definition and Example of Microloans
Microloans are small loans provided to help startups and small businesses thrive. They are often aimed at aiding particular groups of individuals that would otherwise have challenges getting traditional loans. Microloans can come from a number of different sources — often nonprofits, community organizations, online platforms, and individuals. For example, let’s say that the owner of a small bakery is seeking financial assistance to help with some minor repairs that are necessary in the shop’s kitchen. As the owner decided to use the SBA’s Microloan Program, they would first reach out to an intermediary microlender nearby. The microlender would set the terms of the loan and be responsible for credit decisions.
How Microloans Work
Obtaining funding can be difficult for small businesses. Traditional lenders such as banks or other financial institutions may not want to lend to companies that have poor or little credit history, can’t provide adequate collateral, or are seeking small amounts of funding—which means less profit for the bank. Microloans are small loans that are intentionally designed to help meet the needs of startups and small businesses that may not qualify for funding elsewhere. There are community organizations, nonprofit groups, online lending platforms, and individuals that offer microloans. Resources, training, and business advice are often part of receiving a microloan—the loans are designed to help startups and small businesses grow and succeed. Some lenders may ask for a sound business plan, among other requirements. Using the above example of the small bakery, let’s see how the scenario can unfold when the business owner took out a loan of $10,000 in order to make the repairs.
The terms of the loan include a 10% interest rate, with a monthly repayment plan that spans five years. This calculates out to monthly payments of $212.47. At the end of the five years, the business owner would repay the microlender a total of $12,748.23, plus any additional fees. They would have repaid a total of $2,748.23 in interest.
SBA Microloan Program
The SBA has a microloan program that connects lenders and borrowers. The agency funds special designated, nonprofit community-based organizations to be intermediary lenders and administer the loans. Credit decisions and terms for the microloans are determined by the lender. Loans from the program can be as high as $50,000, however, the average amount is around $13,000. Terms and rates vary depending on the lender and factors such as the amount borrowed, how it will be used, and the needs of the small business. Lending intermediaries usually require some form of collateral and a personal guarantee from the business owner. SBA microloans have a maximum repayment term of six years, and the interest rates are typically between 8% to 13%. SBA microloans do come with some restrictions regarding what they can be used for. Business owners can’t use the funds to buy real estate or to pay back existing debt. The loans are intended for use in projects such as rebuilding, repairing, or improving, and making purchases including inventory, supplies, and equipment.
