What are Microloans?
Microloans are small loans, typically $25,000 or less, and can be used for many purposes such as purchasing equipment or inventory, or as start up or working capital. Most microloans are provided via community-based, nonprofit organizations and are designed to help low to moderate-income people who live in rural or disadvantaged communities. According to a study done by ACCION, one of the largest microfinance institutions in the U.S., there are an estimated 13.1 million micro-entrepreneurs in the U.S., including 2.4 million African-Americans and Hispanics, most of whom have never received a business loan and are unable to meet traditional loan qualifications. Terms and interest rates can vary, but in general, microloans have shorter payment terms, competitive interest rates, and are accessible to borrowers who have little to no collateral or poor credit.
The Small Business Administration (SBA) Microloan Program, which is the single largest source of funding for microfinance institutions in the U.S., provides direct funding to qualified community finance organizations, who then issue the loans to borrowers. Currently, the SBA loan limit is $50,000 with a maximum term limit of 6 years and interest rates ranging from 8 to 13 percent. SBA microloans can be used for several types of business financing, but cannot be used to cover debt or purchase real estate. Small business owners who are interested in applying for an SBA Microloan must apply through an SBA-approved, participating microlender.
Accion USA is another leader in the U.S. microfinance industry. The community organization offers several types of small business loans from $500 to $50,000, including group loans in which 3 to 5 borrowers apply together and agree to guarantee each other’s portions of the loan. Accion specializes in working with small business owners who do not qualify for traditional loans, and offers business finance consulting in addition to loans. Other microfinance leaders include Kiva, a peer-to-peer lending web portal, and the Communities at Work Fund, a program that provides funds to Community Development Financial Institutions (CDFIs).
Should I apply for a microloan?
For those seeking a smaller loan amount to finance business growth or keep working capital afloat, and are unable to qualify for a traditional loan, microloans may be a viable option. Operating businesses that are minority or woman-owned or located in distressed communities are especially eligible for these types of loans. To learn more about microlending programs, you can visit the SBA Microloan Program website or the Coalition of Community Development Financial Institutions.
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