Understanding SBA Microloans

The SBA Microloan Program can be of special interest to many of our clients and especially with assisting small start-ups.  Under this program first developed in 1992, the SBA makes funds available to non-profit community-based lenders called “intermediaries” which in turn make loans to Microloan qualified borrowers.  Such intermediaries are usually in the form of Economic Development Corporations (EDCs).

What is a Microloan?

The term “microloan” comes from the average loan size.  SBA Microloans are made in a maximum amount of $50,000 and, according to current SBA statistics, the average loan size is approximately $13,000.  Loans as small as $1,000 or even less are not uncommon.   Such small loans are often deemed too small to bother with by traditional lenders such as commercial banks and the EDCs administering such loans perform a valuable function in the small business community.

Microloan applications for SBA 7(m) Microloans are submitted to the local loan intermediary and all qualification decisions are made at that local level.   Borrowers may also benefit from the business expertise and the many small “microenterprise” business support programs provided by the EDCs, Small Business Development Centers, Chambers of Commerce and local colleges associated with the micro-lending programs. Other features and requirements of SBA 7(m) loans include:

  • borrower must be a corporation or LLC.
  • maximum allowable term of 6 years.
  • interest rates of between 8 and 13%.
  • available to small business entrepreneurs with little or no credit.

Little or No Collateral Required

As opposed to the SBA’s standard 7(a) loans, 7(m) microloans can often be acquired with little or no collateral.  Loan proceeds under 7(m) can be used for…

  • working capital
  • inventory
  • supplies
  • furniture and fixtures
  • machinery and equipment

Application Process

Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. In some cases, after a client applies for SBA microloan financing, he/she may be required to fulfill training or planning requirements before their loan application is considered. This business training is designed to help them launch or expand their business successfully.

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