You want to start or grow a small business, but finding the financing to make your dream come true can be challenging. The Small Business Administration, or SBA, is the largest provider of micro loans in the U.S. The SBA does not make loans directly; it works with a network of intermediary organizations that accept micro loan applications and make all credit decisions related to approving your micro loan. Contact the appropriate SBA District Office to locate intermediary organizations in your area. Here's how the SBA micro loan program works:
SBA Micro Loans: What You Need to Know
Borrowers may be required to attend training sessions about SBA loans and business planning as a condition of loan approval.
Micro loans may require borrowers to put up collateral and personally guarantee repayment. Business News Daily notes that SBA loan approval guidelines are typically less strict than for private lenders due to SBA's guarantee against losses to its network of lenders.
You may use an SBA micro loan for working capital and the following types of business expenses:
- Equipment and machinery
- Furniture and fixtures
- Inventory and supplies
SBA micro loan proceeds cannot be used for buying real estate or paying off existing debt.
Loan approval requirements and loan rates vary by SBA lender, but interest rates typically fall within eight to 13 percent. If one lender declines your application, please try again with another lender. SBA micro loan amounts average $13,000. The maximum loan amount is $50,000. If you already have an SBA micro loan, your combined loan amount cannot exceed $50,000. The interest rate for your micro loan is calculated according to your loan amount:
For loans of $10,000 or less, the interest rate charged is the sum of the rate charged by SBA to the intermediary plus 8.50 percent. For micro loans exceeding $10,000 the interest rate is determined by the rate charged by SBA to the intermediary agency plus 7.75 percent. As an example, if you borrow $20,000 and the
SBA charges the intermediary lender 3.00 percent interest, your interest rate would be 10.75 percent.
The SBA Micro Loan Fact Sheet indicates that borrowers must certify that they have tried but were unsuccessful in securing funds from private lenders.
According to the SBA, the maximum repayment term for your micro loan is six years. Your loan is structured according to the following criteria:
- Loan amount
- Purpose of loan
- Individual lender requirements
- Borrower needs
Financial decisions require thorough review of your needs, and goals, along with pros and cons of the loan you're considering.
Micro Loan Pros and Cons
Benefits of SBA micro loans include:
- SBA micro loans have flexible credit requirements, but requirements can vary by intermediary lender.
- SBA provides guarantees of repayment to its network of lenders. This allows SBA approved lenders to approve loans for those with fair to poor credit.
- SBA has a network of approved intermediary organizations throughout the United States. SBA is a federal agency that won't go bankrupt or go out of business.
- There is little risk of scams or fraud when you deal with an SBA intermediary lender as compared to responding to questionable sources of funding.
Drawbacks of an SBA micro loan may include
- SBA limits how micro loan funds can be used.
- Potential collateral requirements and personal guarantee of repayment.
- SBA delegates its loan approval process to intermediary lenders that may have varying loan approval requirements in addition to SBA requirements.
- SBA is not involved in the loan approval process and does not review appeals for declined loan approvals.
As with any type of loan, it's wise to consider several small business loan quotes. Our network of small business lenders can provide multiple small business loan quotes that you can review and compare small business and micro loan options in the comfort of your home or office.
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