Your guide to business microloans

Key takeaways

• Business microloans are given through the Small Business Administration.
• For-profit small businesses can apply for loan amounts up to $50,000.
• These can be used for a variety of business purposes except debt repayment and real estate.
• Make sure you have all documentation prepared before applying for your loan.

 
Business microloans, also known as micro-business loans, are small loans to help businesses get started. They're provided by the U.S. Small Business Administration (SBA) for any small, for-profit business in the U.S. Freelancers, start-ups, and small businesses may be eligible.

While Elevations doesn't offer SBA loans, including business microloans, we seek to educate our business members on their options and be a trusted source for your next decision.

A microloan can help a business in its early stages that needs funds to stabilize and grow.

What is a business microloan?

Business microloans are loans given through the SBA designed to help start-ups and small business owners fund their endeavors during their early stages. These loans are often used for:

• Inventory
• Working capital
• Supplies and furniture

Microloans can't be used for real estate or to repay other debts.

Unlike larger SBA loans, business microloans are capped at $50,000. According to the SBA, businesses typically take out microloans of about $13,000. The SBA 7(a) loans and 504 loans have a maximum of $5 million.

Why get a business microloan?

A business microloan can help a small business get established. However, you should talk to a financial advisor to make sure it's right for your situation.

Here's how this loan can be advantageous:

Preserve your cash flow

Keep operating funds available for day-to-day expenses

Invest in growth sooner

For new businesses with limited history, a microloan can be a good option to purchase equipment, inventory, and technology. However, equipment loans are an option with more flexibility.

Establish business credit

Closing on a loan for an amount you can repay according to your business plan can help your business establish credit. Just like personal credit, timely payments, responsible borrowing, and consistent cash management can improve your business credit.

Respond to opportunities

With funds available, you can have the resources to pursue new contracts and other expansion opportunities.

What types of businesses are eligible for business microloans?

Rather than have a specific type of business structure, like an LLC or corporation, microbusiness loan applicants must:

• Have a personal guarantee of repayment: The liability rests with the business owner, as a loan is likely secured by their personal assets. This is usually how all loans work.
• Be a for-profit business in the U.S.
• Be a small business as defined by the SBA

What do lenders look for from microbusinesses?

Every lender may have different requirements for business loans. However, cash flow, assets, creditworthiness, and ability to repay a loan are all typical factors in loan approval.

What to do before applying for a microbusiness loan

Applying for any business loan usually requires a few steps. Here's a brief overview of the process:

1. Secure an employer identification number (EIN)
   This can be done simply through IRS.gov. On the IRS website, you’ll find details on when to apply for an EIN and what to know before you apply.
   Note: If your EIN changes, you may need a new business loan account.

2. Register the business with the Secretary of State of Colorado
   Include any trade names you may want to use later, so you can register them as well before opening your account.

3. Contact your local branch before opening your business account
   Ensure you have all relevant documents by talking with the local branch you’re considering.

What documentation do you need before opening a business account?

Business accounts require plenty of information, including from additional signers. Government-issued ID, applicable EINs, recent bank statements, beneficial owner information, articles of organization, balance sheets, tax returns, and operating agreements may be needed by lenders. 

However, make sure to contact your financial institution before coming to a branch to make sure you're prepared with all required documents.

Questions to consider before taking out a loan

To decide if a microloan is right for your business, consider these questions:

• How much funding do I actually need? Review your projected gaps to calculate your needs. If the amount is higher than $50,000, a microloan is probably not the right choice.
• What payment fits my cash flow? Lines of credit such as business HELOCs have more flexible options in which you repay only what you use, while loans typically have fixed payments. Consider what you’ll be able to realistically repay.
• Is a term loan or line of credit better?
• What is the expected return on this investment? Make sure the expected return exceeds the amount you’ll pay in interest and in a timeline that allows you to repay the loan on time.

What Colorado resources are available for new business owners?

Colorado offers several resources for entrepreneurs and small business owners:

• Colorado Small Business Development Center (SBDC): Provides free or low-cost consulting, workshops, and business planning resources.
• Colorado Enterprise Fund: Representatives can help businesses that don’t qualify for traditional funding. As your business grows, they can direct you towards institutions that are equipped to serve your changing needs. Elevations recommends Lewis Hagler.
• Colorado Secretary of State: Allows business owners to register a business, file required documents and register trade names.
• U.S. Small Business Administration (SBA): Offers educational resources, counseling programs and information about SBA-backed loans.
• Local chambers of commerce and economic development organizations: Can provide networking opportunities, mentorship and business support programs. Elevations is proud to support chambers of commerce in Boulder, Fort Collins, and elsewhere.

Is a microloan right for your business?

Microloans offer small businesses the funds they may need to get started. They can't be used for real estate or existing debt repayment. 

Before moving forward, make sure a microloan fits your business by deciding how much money you need, what repayment structure fits your business, and whether the expected return exceeds the interest you'll need to pay. 

If you still aren’t sure whether a business microloan is right for your business, reach out to an Elevations Business Banking Relationship Manager. While Elevations doesn’t offer business microloans, we are happy to advise your business on what financing may fit your needs.

Commonly Asked Questions

• What is the difference between a business microloan and a business credit card?

  A business microloan gives you a lump sum which you'll repay through fixed payments over a predetermined period. Business credit cards can be used repeatedly up to a credit limit. A microloan may be a better fit for larger, planned purchases such as inventory or renovations, while a business credit card can be useful for ongoing expenses and short-term cash flow needs. Compare interest rates for any lending options you're considering, and talk to a business advisor.

• What is the difference between a business microloan and a business line of credit?

  There is no one-size-fits-all answer. Using personal savings avoids borrowing costs and debt obligations, but it can reduce your personal financial cushion. Financing allows you to preserve personal savings and may offer greater fund access. By using a combination of personal funds and financing, business owners can balance risk and opportunity. As always, it's best to talk with a business advisor about financial decisions.

• Should I use personal savings or financing to fund my business?

  There is no one-size-fits-all answer. Using personal savings avoids borrowing costs and debt obligations, but it can reduce your personal financial cushion. Financing allows you to preserve personal savings and may offer greater fund access. By using a combination of personal funds and financing, business owners can balance risk and opportunity. As always, it's best to talk with a business advisor about financial decisions.

• What is a personal guarantee?

  A personal guarantee is the business owner's commitment to repay a loan regardless of the revenue it generates. A guarantee can come through personal assets, such as a car or a house. While businesses such as LLCs can provide liability protection in some situations, lenders may still require a personal guarantee from the business owner.

• How do I establish business credit?

  Building business credit starts with operating your business as a separate entity and managing financial obligations responsibly. Steps may include obtaining an Employer Identification Number (EIN), opening a business bank account, registering your business with the appropriate government agencies, and paying business debts on time. Consistent financial management and a history of responsible borrowing can help strengthen your business credit profile over time.