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Funding 101: Prep

 

The SBA Micro Loans program provides loans up to $35,000 to new businesses or for small businesses focused on growth. The average loan according to the SBA is around $13,000.

Interest rates range from about 8% to 13% per year with a maximum term of six years. These rates will vary based on the size of the loan, the use of funds, and the particular situation of the borrower.

Micro Loans are granted by non-profit Micro Lenders that are funded by the SBA directly. These non-profits assist the borrower throughout the life of the loan to provide management and technical assistance which are generally geared toward making sure you borrow responsibly.

Use of Funds Requirements

Proceeds from a Micro Loan can be used to fund:

  • Working Capital
  • Inventory
  • Supplies
  • Furniture
  • Equipment
  • Fixtures
  • Machinery

Note: Micro Loans cannot be used to pay off existing debts or to purchase real estate.

Eligibility

While the eligibility requirements are greatly reduced compared to a traditional loan, Micro Lenders still require your ability to present a solid case for being able to repay the loan.

The requirements are slightly different for existing Operating Businesses versus new startup businesses.

Operating Business Requirements

For companies that have been in business for at least one year, the Micro Lender will look for the following:

  • 2+ years of industry experience from the entrepreneur.
  • Positive cash flow to pay back the loan.
  • Good personal credit history (or a viable explanation of any bad credit issues).
  • Sufficient collateral from 20% - 100% of the loan value or a co-signer if there is no collateral available.

Startup Business Requirements

Pure startup companies have very few options when trying to borrow against their business, and a MicroLoan is among their first debt options.

Requirements for a startup business typically include:

  • 2+ years of industry experience from the entrepreneur
  • Some form of existing capital in the business
  • Good personal credit history (or a viable explanation of any bad credit issues)
  • Sufficient collateral or a co-signer to cover the amount borrowed
  • A well-composed and realistic business plan
  • An explanation of how you will meet your living expenses while properly servicing the loan.

Technical Assistance Requirements

As part of the program requirements, Micro Lenders must provide adequate business training and technical assistance to its borrowers. As the borrower you may be required to participate in training programs before your application is considered.

Applying for a Micro Loan

Your application for a Micro Loan will need to go through a Micro Lender in your area that can process your required documents and take time to learn about your business needs. You'll want to make sure that you are well prepared with your business plan, financials and use of funds requirements before starting down this path.

Summary

Micro Loans can be a good source of capital up to $35,000 for entrepreneurs who have at least two years of experience in the industry, good credit history, and collateral of at least 20%. Applying for a Micro Loan is much like applying for a traditional bank loan and can be done at a Micro Lender in your area.