Information For Non-Profit Entities Seeking To Become Intermediary Lenders

The Microloan Program provides very small loans to start-up, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $13,000. Applications are submitted to the local intermediary and all credit decisions are made on the local level.

Applying to Become an Intermediary Lender

Organizations interested in becoming Intermediaries should contact SBA for information on the application process and should review the regulations published in the Code of Federal Regulations, specifically sections 120.700-120.716. In order to participate in the program, applicants must meet three general criteria: 

• An applicant must be organized as a non-profit organization, quasi-governmental economic development corporation, or an Agency established by a Native American Tribal Governement;
• An applicant must have made and serviced short-term fixed rate loans of not more than $35,000 to newly established or growing small businesses for at least one year; and
• An applicant must have at least one year of experience providing technical assistance to its borrowers.

Applications should contain supporting information describing:

• The types of businesses assisted in the past and those the applicant intends to assist with Microloans;
• The average size of the loans made in the past and the average size of intended Microloans;
• The extent to which the applicant will make Microloans to small businesses in rural areas;
• The geographic area in which the applicant intends to operate, including a description of the economic and demographic conditions existing in the intended area of operations;
• The availability and cost of obtaining credit for small businesses in the area;
• The applicant's experience and qualifications in providing marketing, management, and technical assistance to small businesses;
• Any plan to use other technical assistance resources (such as counselors from the Service Corps of Retired Executives) to help Microloan borrowers.

Terms and Conditions of an SBA Loan to an Intermediary

An Intermediary may not borrow more than $750,000 in the first year of participation in the program. In later years, the Intermediary's obligation to SBA may not exceed an aggregate of $3.5 million, subject to statutory limitations on the total amount of funds available per state.

During the first year of the loan, an Intermediary is not required to make any payments, but interest accrues from the date that SBA disburses the loan proceeds to the Intermediary. After that, SBA will determine the periodic payments. The loan must be repaid within 10 years. 

The interest rate charged to the Intermediary is equal to the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less 2.00 percent during the first year and 1.25 percent adjusted annually. Intermediaries that maintain an average loan size of $10,000 or less are known as Specialized Intermediaries and maintain the rate applicable to five-year obligations of the United States Treasury, adjusted to the nearest one-eighth percent, less two percent. Portfolios are evaluated annually to determine the applicable  rate.

Intermediary Lender's Financial Contribution

The Intermediary must contribute from non-Federal sources an amount equal to 15 percent of any loan that it receives from SBA. The contribution may not be borrowed. For purposes of this program, Community Development Block Grants are considered non-Federal sources.

As security for repayment of the SBA loan, an Intermediary must pledge to SBA a first lien position in the Microloan Revolving Fund (MRF) (described below), Loan Loss Reserve Fund (described below), and all notes receivable from Microloans.

SBA does not charge Intermediaries any fees for loans under this Program. An Intermediary may, however, pay minimal closing costs to third parties, such as filing and recording fees.

Microloan Revolving Fund

The Microloan Revolving Fund ("MRF'') is an interest-bearing Deposit Account into which an Intermediary must deposit the proceeds from SBA loans, its contributions from non-Federal sources, and payments from its Microloan borrowers. An Intermediary may only withdraw from this account the money needed to establish the Loan Loss Reserve Fund, to make microloans to borrowers, and to repay SBA.

Loan Loss Reserve Fund

Loan Loss Reserve Fund ("LLRF'') is an interest-bearing Deposit Account which an Intermediary must establish to pay any shortage in the MRF caused by delinquencies or losses on Microloans. An Intermediary must maintain the LLRF until it has repaid all obligations it owes SBA. An Intermediary must maintain a balance on deposit in its LLRF equal to 15 percent of the outstanding balance of the notes receivable owed to it by its Microloan borrowers ("Portfolio'').

Conditions on Loans by Intermediaries to Microloan Borrowers

An intermediary may make Microloans to any small business eligible to receive financial assistance under this part. A borrower may also use Microloan proceeds to establish a nonprofit child care business. Proceeds from Microloans may be used only for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment. Loans can not be made to acquire land or property. SBA does not review Microloans for creditworthiness.

Generally, intermediaries should not make a Microloan of more than $10,000 to any borrower. An Intermediary may not make a Microloan of more than $20,000 unless the borrower demonstrates that it is unable to obtain credit elsewhere at comparable interest rates and that it has good prospects for success. An Intermediary may not make a Microloan of more than $35,000, and no borrower may owe an Intermediary more than $35,000 at any one time. Each Microloan must be repaid within six
years.

(The maximum interest rate that can be charged a Microloan borrower is determined by the following formula: 

• On loans of more than $10,000, the interest rate charged on the SBA loan to the Intermediary, plus 7.75 percentage points; and
• On loans of $10,000 or less, the interest rate charged on the SBA loan to the Intermediary, plus 8.5 percentage points.

Technical Assistance Funds to Intermediary Lenders to Assist Microloan Borrowers

An Intermediary is eligible to receive grant funding from SBA of not more than 25 percent of the outstanding balance of all SBA loans to the Intermediary. The actual amount of grant funding is determined by a set formula and is subject to availability of appropriated funds. Intermediaries that do not meet minimum performance criteria are not eligible to receive grant funds. The Intermediary must contribute, solely from non-Federal sources, an amount equal to 25 percent of the grant. Contributions may be made in cash or in kind, but an Intermediary may not borrow its contribution. It may only use grant funds to provide Microloan borrowers with marketing, management, and technical assistance. Up to 25 percent of the funds can be used to provide information and technical assistance to prospective Microloan borrowers. Grant funds may be used to attend training required by SBA, but the use of funds for this purpose must be approved by SBA. Intermediaries may not enter into third party contracts for the provision of technical assistance to program clients.

Small Businesses interested in receiving a Microloan should use the following link and also contact their local SBA District Office. Information for Small Businesses