SBA micro loans offer big benefits

Janet Arrowood

The U.S. Small Business Administration offers many loan programs  — including the sometimes overlooked microloans.

While the SBA guarantees other loans issued by lenders into the millions of dollars, the microloan program is different. The program provides loans of up to $50,000 — although some intermediary lenders offer higher amounts — to help small businesses and some not-for-profit childcare centers start and expand. According to the SBA, the average microloan is about $13,000.

Keep in mind the SBA doesn’t actually make microloans. Instead, the federal agency provides funds to specially designated intermediary lenders — nonprofit community based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the microloan program for eligible borrowers. Borrowers can be from any industry and at any stage of the business life cycle — from startups to mature operations. SBA-approved lenders make credit decisions and set terms.

In addition to SBA requirements, each intermediary lender has its own requirements and qualifications for microloans. Many of these lenders are community development financial institutions focusing capital deployment on entrepreneurs who might not meet the requirements for mainstream financial institutions and traditional SBA-guaranteed loans. Expect to put up collateral and personally guarantee the loan. You might need to obtain life insurance on the life of the guarantor to further protect the interests of the intermediary lender, although this requirement is less common on microloans than other SBA-guaranteed loans.

While each intermediary lender has its own documentation requirements, the following offers an overview of what to expect.

Personal documentation includes two forms of identification for each loan guarantor, at least one form of ID with a photo.

Business documentation includes a business plan, employer ID number form, W-9, articles of incorporation or organization unless the business is a sole proprietorship, certificate of good standing from the secretary of state’s office, operating agreement for limited liability companies, bylaws for corporations, a sub-chapter selection if applicable and proof of business and liability insurance.

Financial documentation includes at least two years of personal tax returns and schedules, income statement, balance sheet, cash flow statement, business debt schedule and most recent three months of personal and business bank statements. If the business is a startup, provide a business plan and financial projections in lieu of financial statements.

Intermediary lenders providing microloans in Colorado include:

Colorado Enterprise Fund: https://coloradoenterprisefund.org.

Region 9 Economic Development District of Southwest Colorado: www.region9edd.org.

AltCap: www.altcap.org.

Community Enterprise Development Services.

Region 10 LEAP for Economic Development.

Microloans can be used for a variety of purposes that help small businesses expand, including working capital, inventory, supplies, furniture, fixtures, machinery and equipment. Proceeds can’t be used, however, to pay existing debts or purchase real estate.

Each intermediary lender sets its own repayment terms and conditions. Repayment terms are generally based on the amount borrowed, planned use for the funds, lender requirements and needs of the small business owner. Current interest rates run between 9 percent and 14 percent.