Why You Should Hire For Personality Instead of ExperiencesIf you’ve come across the term “Microloan” while searching for small business loan options, you’ve likely inferred that it is a loan with a small borrowing limit. Maybe that sounds like just what your company needs, but you most likely have questions about how this funding alternative works. Just how micro are these loans? How do they compare to traditional bank loans and other borrowing alternatives?

Here are answers to small business owners’ most frequently asked questions about microloans:

What’s the difference between a microloan and a traditional business loan?

Beyond the dollar amount, the primary difference between a microloan and a traditional business loan is the source of the funding. While traditional loans are funded by banks, the majority of microloans are funded in association with the Small Business Administration. The SBA launched the microloan program in 1992 in an effort to increase the availability of small quantities of funding to small business borrowers. Other microloans are funded by state and local governments and certain philanthropies.

Microloans can also carry slightly higher interest rates than traditional loans and may involve additional steps in the application process as required by the SBA.

Who would the loan provider be?

The Small Business Administration distributes microloan funds to designated community-based nonprofit organizations with experience in business management and lending assistance who serve as the intermediary lenders. In addition to administering these microloans, these intermediaries also provide management and technical assistance to help borrowers launch or grow successful businesses. A list of participating microloan intermediary lenders around the country is available on the SBA website.

Is my company eligible for a microloan?

Lending and credit requirements are at the discretion of each intermediary lender, who may require the business owner’s personal guarantee and/or some time of collateral. Though not expressly required by the SBA, some intermediaries give preference to businesses that are minority or woman-owned, or businesses operating in financially distressed communities.

How much could I borrow?

The maximum allowable borrowing amount for a Microloan is $50,000, but average borrowing amounts are closer to $13,000. Some intermediaries offer loans as little as $500.  As with any loan, your borrowing amount would be negotiated directly with the intermediary lender and would depend on the intended use of the financing.

How can the funds be used?

One of the benefits of a microloan is that it can be used toward a wide variety of business needs. If your company needs a relatively small amount of working capital to purchase inventory, furnish your office space, or invest in machinery or equipment to run your business, a microloan may be just what you need. However, the SBA does stipulate that microloans cannot be used to purchase real estate, or to pay existing debts on a previous loan.

What is the term length of the loan?

The only specific requirement of the Small Business Administration is that microloans may carry a maximum term of 6 years. Beyond that stipulation, the term of a microloan – similarly to any traditional loan – can vary based on several factors, such as the loan amount, the needs of the borrower, planned use of the funds, and the standards of the intermediary lender.

What is the interest rate?

In general, interest rates for microloans funded by the SBA fall between 8 and 13 percent. However, these rates can vary between intermediary lender and depend on costs from the U.S. Treasury.

Why might a microloan be the right borrowing choice for me?

Traditional banks may be reluctant to approve small quantity loans, especially for new businesses with limited operating history. And with interest rates in the realm of 22%, credit cards can quickly bankrupt a new business. If you have a relatively new startup business with funding needs too small to be serviced by a traditional bank loan but too high to rely on a business credit card, a microloan may be a great borrowing alternative. SBA Microloans can be especially useful to first generation entrepreneurs who may benefit from the intermediary lender’s business expertise and training programs.

How do I apply?

To apply for a microloan, contact an approved intermediary provider in your community. You’ll need to provide a business plan, and some intermediaries may require collateral and/or a personal guarantee from the business owner. Before considering your application, certain intermediaries may require you to complete business training or fulfill requirements designed to help you successfully launch or expand your business.

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.