SBA-Guarateed Microloans

This primer on SBA Guaranteed Microloans was written as a chapter in the book called, Where's the Money. I wrote the book under agreement with its' authors Dwayne Moyers and Art Beroff and with Entrepreneur Media, Inc.

David R. Evanson

Where’s the Money?, Winter, 1999


Definition Or Explanation: The MicroLoan Program was developed by the Small Business Administration in 1992 to increase the availability of very small loans to small business borrowers. It achieved permanent status in 1997. The program utilizes nonprofit intermediaries to make loans to new and existing borrowers, and from 1993 through January, 1998, accounts for 6,380 loans, totaling more than $65 million.

Appropriate For: These funds may be used for working capital and for inventory, supplies, furniture, fixtures, machinery and equipment.

Supply: MicroLoans are available from private, nonprofit intermediaries. Currently, the program is administered by 105 non profit organizations serving their communities in 49 states plus Washington, D.C. and Puerto Rico. According to the SBA, there is a sufficient supply of funds due in part to a self-sustaining revolving fund.

Best Use: For start-up companies with lower capital requirements and limited operating history. MicroLoan borrowers may benefit from the intermediaryzzs expertise in business.

Cost: Negotiable with intermediary, but rates tend to be higher than standard business loans. Most loans are collateralized by equipment, contracts, inventory or other property and require personal guarantees.

Ease Of Acquisition: This is an especially good source of funds for businesses that have not borrowed from a bank before. And it provides a source of smaller loans which many banks are reluctant to service, especially as a business loan. One of the difficulties in obtaining MicroLoan funding, however, lies in the nonprofit intermediary distribution system. These intermediaries distribute funds in their own communities and/or regions and so, if one does not exist in your area, SBA MicroLoan financing may be difficult to get. If this is the case, however, there are other MicroLoan programs, often backed by state and local governments, that can offer an alternative.

Range Of Funds Typically Available: Under $100 to a maximum of $25,000. Average loan size is $10,400, with an average loan maturity of 37 months. Maximum term for a loan is six years.

Often, itzzs the small loans that can be hardest to get, and most commercial banks are reluctant to make business loans under $10,000. Business owners who need less, or do not qualify for more, are left out in the cold unless they want to borrow the money personally. This latter option is often more expensive, typically ignores any business collateral and, perhaps most important, does nothing to advance the credit of the business.

“MircoLoans enable businesspeople to get small loans that are treated as business loans,” says Millard Owens, Director of Microlending for Self-Help, a nonprofit commercial development financial institution. “This is not to say that personal issues are not factored in, but that the strength of the business can help to offset some personal inadequacies.”


A Good Deal: If your choice is between getting a personal loan and using the proceeds for your business, or getting a MicroLoan with the business as the borrower, take the MicroLoan. Even though you will have to personally guarantee the loan, it will help the business establish a sound credit rating. And as the bankers like to say “A good credit rating is your best asset!”.


For a new business, a new borrower, or a borrower with some blemishes in their credit history, the MicroLoan Program can provide an answer to the Catch 22 of lending–not being able
to get money unless you have it. These loans have a range starting at just $100 and moving up to a maximum of $25,000, though different lenders may have their own minimums, so itzzs wise to clarify this up front when shopping for a loan. Starting small, allows small businesses an excellent means of establishing business credit and improving their credit profile.

Some MicroLoan lenders focus extensive resources on offering training to their small business borrowers in management and other critical business skills, while others focus primarily on lending. Many MicroLoan borrowers can benefit from these services, and availability of these services may be a consideration when choosing a MicroLoan lender.

MicroLoan lenders can often be more flexible than traditional lenders in their underwriting criteria, especially for smaller loans. They will look not only at credit history, collateral and debt history but tend to spend more time and attention on individual applicants. In addition, because of the nature of their small business clients, many MicroLoan lenders have already had experience with businesses that are considered to be risky by traditional lenders. With this
experience, they are often more open to these types of ventures and more able to offer managerial


Shop Talk: Every lender has so-called underwriting criteria, but what is it exactly? These criteria spell out the standards and guidelines which the lender lives by. “Companies which have been in business at least two years with positive cash flow” would be two very simple underwriting criteria. When meeting with a lender, ask about their criteria to get some idea of how your company matches or mismatches their profile.


Owens also suggests that potential borrowers–and other small businesses as well–check into other sources of technical and managerial assistance. Try local colleges and universities,
chambers of commerce, and the SBA (see sidebar). Not only will you gain useful information, but this effort will help to demonstrate your seriousness and commitment to a prospective lender.

MicroLoan lenders are not trying to compete with other lenders, and so you may find that their rates are higher than other loans. On the other hand, the rates are lower than credit cards and other vehicles often used to finance small amounts.

Convenient access to a MicroLoan lender may be an issue for some borrowers due to the limited number of SBA MicroLoan lenders, and their mandate to serve their local and regional economic development. To find out if there is an SBA MicroLoan lender in your region, call your district SBA office or go to and check under lending and local resources. There are other types of non-SBA MicroLoan lending programs, generally backed by state or local governments. Ask your banker or contact state or local Chambers of Commerce or your State Department of Commerce for more information about these programs. Some universities also offer assistance to small businesses through the SBA, and it may be worth a call to the business department of a nearby university or college.

Another drawback of the MicroLoan program is the limited product line. Self-Help for example does not offer a credit line under the SBA program. Not all MicroLoan lenders offer a full range of loan products, or even the full range of MicroLoan amounts. So, if you anticipate needing larger amounts of funds going forward, it may be worth considering establishing a relationship with a traditional lender.

Self-Help is one of the nationzzs most active SBA MicroLoan lender, and Owens, has been very involved in many of these loans. He says that the process of applying for the loan can be made easier by understanding what is involved and offers this explanation of what happens at their organization when a potential MicroLoan borrower initiates the loan process.

During the first call, a Self-Help staff member will take the time to get some preliminary information, and in this initial conversation, the borrower will be asked a number of basic
questions including:

– Is this a start-up or existing business?
– How much money is needed and for what purpose are the funds intended?
– Who is included in the management team and what is their experience?
– What collateral is available?
– How much funds have you already invested, or are you willing to invest?


Donzzt Forget: Lenders speak the language of finance. You cannot converse with them without financial documentation. Even if you are a very tiny business seeking a very small loan, you must still have personal and business tax returns to get the process beyond the “nice to meet you” stage.


Following this preliminary information gathering call, applications are sent via mail, along with a form from which applicants are asked to develop a personal financial statement.

Business plans are not required at all levels according to Owens, but borrowers must have a complete understanding of their market, their capacity, and their competition. Previous financial statements are required for existing businesses, but in the case of start-ups, personal tax returns are often substituted.

Once this data is reviewed, Self-Help will contact the applicant by phone, usually within a few days. During this period, Self-Help will have a credit report to add to the information supplied by the applicant. Often, adds Owens, the application is not complete and additional information is required. Many times it is the tax returns that are among the missing. The best advice, especially if youzzre in a hurry, is to make sure to supply all requested information and, almost as important, make it as clear as possible in terms of the presentation of the information. In other words, if the lender canzzt read it, it may as well not be there.

From there, if the loan request is small, that is $5,000 and less, the process can be completed in a few days. Larger amounts take longer–three to four weeks–because additional
information is required.

In summary, the MicroLoan program can offer a cash and credit jump-start to small or start-up businesses. Unlike many of their counterparts, these lenders are comfortable with the needs, collateral, and experience level of small borrowers, and are flexible in their dealings with this important part of the economy.

A Good Deal: Check out the SBAzzs Womenzzs Business Center, a Web site for women who want to start or expand their businesses. Therezzs free online counseling and a world of information about business practices, management techniques, technology training, market research and SBA services. Go to

SIDEBAR: Help is on the Way

The SBA provides a variety of business counseling and training services to current and prospective small business owners. You can locate where these services are offered near you simply by calling the nearest Small Business Administration district office or by visiting the SBAzzs Web site at

– The Service Corps of Retired Executives. The collective experience of SCORE counselors spans the full range of American enterprise. SCORE volunteers provide free management and technical assistance in all aspects of running a business — from writing a business plan to accounting and marketing and are available at SBA district offices, business information centers and some Small Business Development Centers.

– Small Business Development Centers. SBDCs offer a broad spectrum of business information and guidance from assisting with market research to help preparing business plans. In addition, SBDCs offer assistance in preparing loan applications. The program is a cooperative effort of the private sector; the educational community; and federal, state and local governments.

– Business Information Centers. BICs provide the latest in access to high-tech hardware, software and telecommunications to help small businesses get started and grow strong. Supported by local SBA offices, BICs also offer expert counseling by SCORE volunteers.

– One-Stop Capital Shops. OSCSs are the SBAzzs contribution to the Empowerment Zones/Enterprise Communities Program, an interagency initiative that provides resources to economically distressed communities. The shops provide a full range of SBA lending and technical-assistance programs such as help with preparing financial statements, preparing loan applications, or credit counseling.


Taking Action: Raising money is about making connections with other people. After all, itzzs somebody else thatzzs got what you need. And often itzzs a random path that leads you to the gold at the end of the rainbow. Pick anyone of the above technical resources, make an appointment, see a counselor or consultant, and ask them to point you in a direction, any direction.


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