A microloan is a small loan, traditionally guaranteed (and sometimes granted) by government organizations and extended to small business owners. In the United States, the majority of microloans are issued through the Small Business Administration’s microloan program, which provides funds to intermediary community lenders who grant loans to small business owners. SBA microloans are worth up to $50,000, and the average loan is for $13,000. However, there are also other groups and organizations throughout the country and the world who offer microloans.
Although rules vary between lenders and programs, microloans help businesses with start-up costs and expansion, and generally, the funds can be used for working capital, inventory or supplies, furniture, machinery and equipment. Beyond that list of basics, microloans are helping businesses and communities in unique and interesting ways.
Who’s Eligible for Microloans and How to Use Them
- Disenfranchised Populations
In 2015, the SBA microloan program originated a total of $52 million in microloans. With an average loan size of approximately $14,038, these funds helped all kinds of fledgling entrepreneurs, but the majority of loans (85 percent) went to minority small business owners. The program also has a mentorship training program, so in addition to giving women, minorities and other historically disenfranchised groups funding, it also provides them with business support and training opportunities.
- Low-Income Female Entrepreneurs
A range of local organizations review and fund SBA microloans, and recently, Grameen America, a 501 non-profit microfinance organization, signed on as a microlender. However, the organization has been helping women for years. Through its own microloan program, the nonprofit has distributed $480 million in loans to 75,000 women in 11 different cities with businesses spanning numerous industries.
- Individuals on Probation and Parole
For parolees and felons, it can be hard to secure employment much less access funding to start their own companies. The SBA microloan program seeks to change this reality, and in 2015, the organization began modifying its existing rules which denied loan eligibility to businesses with more than 20 percent ownership by someone under probation. Now, individuals who are currently on probation or parole are eligible for microloans.
The United States Department of Agriculture (USDA) Farm Service Agency (FSA) also has a microloan program designed specifically for farmers. The program grants government-backed loans to small and mid-sized farming operations with an emphasis on farmers who sell their wares through farmers markets, farm trucks or CSA (community supported agriculture) co-ops. Additionally, the program also seeks to support farmers who embrace alternative growing methods such as hydroponics, aquaponics, organic farming and vertical growing efforts. With 16,800 loans worth a total of $373 million granted, the average farm microloan is about $22,000 and is used for everything from seed, to feed, to fertilizer, to tools, to fences, to living expenses.
- Veterans and Farms
Unfortunately, loans through the SBA program cannot be used to buy real estate, and traditionally, FSA loans did not cover real estate costs either. However, last year the agency expanded the program. In particular, it made microloans available to veterans who often said that buying land was the biggest hurdle to starting a farm.
In addition to historically disenfranchised groups who are helped by microloan programs, it’s also interesting to look at exactly how these loans are being used. In Western Michigan, for example, a restaurateur used a local microloan, granted through Western Michigan’s Micro Lending Initiative, funded by the Opportunity Resource Fund and administered through Huntington National Bank, to expand his business and make it more cost effective.
The borrower used the $40,000 microloan to buy the building he was renting for his Ethiopian restaurant. The funding allowed him to save money compared to what he was paying for rent, and it paved the way for him to remodel the storefront of an old shopping center for his restaurant.
- Economic Growth
Microloans aren’t just designed to help the borrowers who receive the loans. At their heart, microloans are often about building communities and improving economies. In Iowa, microloans are currently at the heart of a bid to attract more immigrants to the area.
Without immigrants, the state is at negative net growth, a dangerous position for its economy. However, if it can attract foreign-born entrepreneurs to the area, that may provide the boost the state’s economy needs. To facilitate this growth, Iowa plans to offer microloans, mentor-matching programs and guidance on U.S. laws and financial systems.
- Sweet Condiment Production
In Louisville, Kentucky, a local microloan program lent out $145,000 in microloans to nine different local businesses. The businesses ranged from web design consultants, to a barber shop, to an education center, and the funds paid for everything from playground equipment, to scissors, to marketing campaigns.
One loan recipient received $15,000 for her sweet condiment business. The company, Nanny’s Chow Chow, employees three people and produces a sweet condiment which it distributes to Kroger grocery stores. The owner earmarked the loan for marketing and to purchase more inventory for production.
Small business owners use microloans in a range of ways, dependent on their needs and the terms of the microlender. These loans have helped business owners hire new employees, initiate new marketing campaigns, expand existing operations, buy inventory and much more. At the same time, they have supported local economies and helped individuals who may have had trouble accessing traditional financing.