Is a Microloan Right for You?

If you've been tossing around an idea for a small business, but wondering where you'll find the money you need to get started, perhaps you should consider a microloan. Microloans are ideal for getting a new business off the ground. A microloan can also provide an infusion of cash to help an existing small business grow.

The term "microloan" refers to a business loan smaller than most banks care to process, often to a borrower no bank would consider. The term came into vogue during the 1980's, as funders began to realize that $200 loaned to a cooperative of women in a third world country could empower those women to start a business capable of supporting their families.

In the United States, a microloan is usually between $2,000 and $35,000. Most microloans in this country are made by non-profit organizations funded by the Small Business Administration, a government agency. The SBA established a pilot program for microloans in 1992, and the program was made permanent in 1997. To date, more than $112 million has been made available to small businesses under the microloan program.

Virtually any kind of small business can apply for a microloan. The form of the business, whether it is a sole proprietorship, a partnership, or a corporation, is not a determining factor. Non-profit daycare centers are also eligible to apply.

Loan funds can be allocated as working capital. The funds can also be used to purchase inventory, supplies, furnishings, fixtures, machinery or equipment. The one restriction is that the funds may not be used to purchase or make a down payment on real estate.

Perfect credit is not necessary, although the credit requirements vary according to the requirements of the lender. Often lenders require collateral, but may be very flexible in terms of what they accept as collateral. For example, a lender may accept jewelry, office equipment, or used cars to collateralize the loan.

Interest rates vary, but they are usually slightly higher than rates for conventional bank loans. Terms vary according to the size of the loan, the planned use of the funds, the requirement of the intermediary lender, and the needs of the borrower. The maximum term for repayment is six years.

One of the real benefits of securing a microloan has nothing to do with the money. The non-profits that serve as intermediary lenders also provide a significant level of management training and coaching. For example, a lender may require a prospective borrower to participate in a class and receive assistance in writing a business plan.

Another benefit is speed. The process of applying, qualifying for, and obtaining a microloan usually ranges between a few days and three weeks, depending upon the amount of funds needed, the procedures employed by the lender, and the degree of preparation on the part of the borrower. To speed the process along, it's a good idea to assemble as much paperwork as possible in advance. Borrowers should be prepared to provide tax returns, financial statements for existing businesses, bank account records, and proof of collateral.

To find out about lenders in your area, you can phone 1-800-U ASK SBA. Or use the following link to get a list of lenders nationwide: http://www.sba.gov/gopher/Local-Information/Microloan-Lender-Participants

2003 - 2005 © Jillian Coleman Wheeler

Jillian Coleman Wheeler is a Grants and Business Consultant. Her website, http://www.GrantMeRich.com, is a resource site for entrepreneurs, grant writers and consultants, and offers online training for grants consultants. She is also author of The New American Land Rush: How to Buy Real Estate with Government Money. For information: http://www.NewAmericanLandRush.com You may reprint this article, if you credit the author and include this resource box. Please notify the author of publication information: jillian@grantmerich.com