Microloans are very small loans to borrowers who typically lack collateral, steady employment and verifiable credit history.
The U.S. Small Business Administration (SBA) established a microloan program in 1992 to increase the availability of very small loans. SBA microloans are up to $50,000, with an average microloan of about $13,000. The SBA microloans are available through nonprofit intermediaries.
How to prepare to apply for a microloan:
Upside: Microloans are an especially good source of funds for businesses that have never borrowed from a bank. The program provides a source of smaller loans that many banks are reluctant to service, especially as a business loan.
The loans can be best for startup companies with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary's expertise in business.
Downside: Microloan interest rates tend to be higher than for standard small business loans. SBA microloan funding can also be difficult to get if your community does not have a nonprofit serving as an intermediary for the program.
Lending and credit requirements vary among intermediary lenders. Often, some type of collateral or personal guarantee is required in order for a business owner to obtain a loan.
More Tips: Microloans can pay for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment.
If your business doesn't qualify for an SBA-funded microloan, there might be other local microloan programs that can offer an alternative. When it comes to finding one, asking around might be the best strategy.
Source: Entrepreneur www.entrepreneur.com/article/52724