Small Business Microloans: What They Are And Where To Get Them

Most small business owners already know they can turn to lenders for help to cover large expenses, like the purchase of a fleet of vehicles, expensive equipment, or commercial real estate. However, these loans are often difficult to obtain from traditional lenders like banks, particularly for very small or newly established businesses.

Whether you need a relatively small loan amount or don’t qualify for funding from traditional lenders, there are options out there. In fact, one of the best ways small business owners can fund their business expenses is via microloans.

Ready to explore alternative business loan options? Read on to learn more about microloans and why today’s small business owners are leaning on this source of financing to bolster their businesses.

What Are Microloans?

business loan vs personal loan

A microloan is defined as a small loan that is typically for $50,000 or less. Microloans offer an alternative to traditional bank loans. These loans are for smaller amounts, so they are easier to qualify for, opening up options to small businesses that aren’t eligible for conventional loan options, either due to low revenue or lack of establishment.

How Can Microloans Be Used For Business?

Microloans can be used for almost any business purpose. Microloan proceeds can be used for a startup project or to get a business off the ground. Loans can be used to expand a business through the purchase of equipment, an office lease, or the hiring of employees. Microloans can also be used as working capital. Specific microlenders may have their own policies surrounding what expenses can be paid using loan proceeds.

What Type Of Business Would Benefit From A Microloan?

The businesses that would benefit most from microloans are smaller businesses with fewer employees and lower capital needs. A business that needs a large sum of money for a big expense, like purchasing commercial real estate, should consider other options.

Business owners that would not qualify for traditional bank loans are also great candidates for microloans. This includes startups and new businesses that may not have the documentation, years in business, or revenue required for other loan options. Microloans can be a great choice for women-owned and minority-owned businesses, as well as businesses in underserved and low-income areas.

Because requirements are not as strict, business owners with lower credit scores may qualify for microloans. In addition to getting the money that is needed at the moment, when the loan is paid as agreed, it can help a business boost its credit score to potentially qualify for larger loans in the future.

What Interest Rates Can I Expect From A Microloan?

Like other types of loans, microloan rates vary based on a number of factors, including the chosen lender’s policy and the creditworthiness of the borrower.

Credit score is still an important consideration for microlenders, although minimum score requirements are typically lower than they would be for bank loans and other conventional business loans. Borrowers with the highest credit scores will receive the best interest rates, while borrowers with lower scores will typically be approved with much higher rates.

Other risk factors may be evaluated when determining the interest rate of a microloan. This may include time in business or whether collateral will be required. Borrowers that have collateral to offer may qualify for lower interest rates and better terms.

With all of these considerations, what kind of interest rates should a borrower expect to see when applying for a microloan? On the lower end, an average rate of about 6% for the most qualified borrowers is possible through some lenders.

However, most borrowers should expect to receive interest rates between 8% and 18%. Borrowers with lower credit scores may receive even higher interest rates – sometimes 30% or more.

While these interest rates are higher than those of other loans, easier qualifications and the resources provided by microlenders make them an appealing choice for many small business owners.

Microloan Borrower Qualifications

Borrower qualifications for microloans are much less stringent than they are for other types of small business loans. Requirements vary by lender, but there are a few general rules to remember.

Some microlenders, such as Small Business Administration intermediaries, have their own definitions of a “small business,” which may limit the number of employees, annual revenue, and net worth of the business.

Business owners that seek out microloans should also have a credit score of at least 620. Most microlenders require a score in the low- to mid-600s, at a minimum. While some lenders may accept lower scores, interest rates will typically be much higher.

Borrowers of microloans must not request funding over the organization’s limits, which is usually $50,000. It is important to note here that many organizations receive federal grants and have a limited amount of money to give, so a borrower may not be approved for the maximum amount. Microloan borrowers must also use the loan proceeds only for approved business expenses.

Collateral may be required for some microloans but will depend upon the creditworthiness of the borrower, the amount of the loan, and the lender’s own policies. Even if specific collateral is not required, a personal guarantee or blanket lien is typically part of the loan contract.

Where To Find Microloans

Does a microloan seem like it will be the logical financing choice for your business or startup? If so, the next step will be to begin the application process, which starts with finding a microlender.

The Small Business Administration (SBA)

Loans through Small Business Administration programs have gained a solid reputation among business owners because of their low rates and favorable terms. The SBA’s Microloan program is no exception.

SBA 504 Loans

Borrowing Amount

$500 – $50,000

Term Lengths

Up to 6 years

Interest Rates

6.5% – 13%

Borrowing Fees

Possible fees from the loan issuer

Personal Guarantee

Guarantee required from anybody who owns at least 20% of the business

Collateral

Collateral normally required, but depends on the lender

Down Payment

  • No down payment for most businesses
  • Possible 20% down payment for startups
  • Possible 10% down payment for business acquisition loan

SBA Microloans are not issued directly through the organization. Instead, loans are obtained through non-profit intermediaries. Funding of up to $50,000 is available, but the average loan amount distributed through this program is $13,000.

Funds from the SBA Microloan program can be used for the purchase of supplies, inventory, fixtures, machinery, and equipment. It can also be used as working capital. Loans cannot be used for the purchase of real estate or to refinance existing debt.

The maximum repayment term for SBA Microloans is 6 years and interest rates range between 8% and 13%. Collateral may be required, as well as a personal guarantee. Loans are available to for-profit small businesses and non-profit childcare centers.

Non-Profit Lenders

There are many non-profit lenders that provide millions of dollars in microloans each year. One of the most popular is Grameen America, which provides microloans of $1,500 and financial training to female entrepreneurs.

Another popular microlender is Kiva, which provides up to $10,000 at a 0% interest rate. Borrowers prove their creditworthiness by inviting friends and family to loan to them, then can fundraise to over 1.6 million lenders through Kiva’s platform for 30 days. Borrowers have up to 36 months to repay the loan.

Other nonprofit lenders serve particular regions in the United States. For example, Accion New Mexico provides lending services and business counseling to borrowers in New Mexico, Nevada, Texas, Colorado, and Arizona. Opportunity Fund is another microlender that services business owners in the state of California. A quick online search will yield non-profit lenders in your area, or you can ask for microlender referrals through colleagues, friends, family, or your financial institution.

Alternative Lenders

Alternative lenders have risen in popularity in recent years because they have simplified the lending process. While most alternative lenders do not classify themselves as microlenders, they often have smaller loans available for small businesses.

A few of the most popular options include Credibly, LoanBuilder, and OnDeck.

Lender Max. Borrowing Amount Rates Req. Credit Score Next Steps

$250,000

9% – 36% factor rate

500

Visit Site

$500,000

2.9% – 18.72% factor rate

550

Visit Site

$500,000

9.4% – 99.7% APR

500

Visit Site

These loans are top choices for business owners because of easier requirements and faster approval and funding. However, interest rates for these loans may be higher than other options and terms not as favorable. When choosing an alternative lender, it’s important to fully assess the total cost of the loan, including interest and fees, to ensure it’s a wise business decision.

How To Apply For A Microloan

Once a lender has been selected, it’s time to begin the application process. This process varies from lender to lender, but there are generally a few similarities across the board.

Before you start the application, pull your credit report and score. This is an easy step, since you can access your credit score online at no cost. Review your score and make sure that it aligns with the requirements of your chosen lender. If not, consider other options or work to clean up your credit before applying.

Once you’re ready to apply, an application will need to be submitted along with documentation. This may include personal and business financial statements, bank statements, and financial projections. Some lenders require a detailed business plan, especially from startups and new businesses. Documentation requirements vary by lender, and more paperwork may be required after you begin the process.

For some microloans, specific collateral may be required, especially for larger amounts. However, if specific collateral is not required, a blanket lien may be included in the loan contract, or you may be required to sign a personal guarantee holding you liable for the debt if the loan goes into default.

One of the best things about microloans is that the application process can be much more personalized. Microlenders are often very willing to walk you through the entire process and provide advice and resources if needed.

Some microlenders require borrowers to go through training or classes before the loan will be approved and released. You should take advantage of these resources, which can help put you on the path to operating a successful business.

Once all documentation is submitted and requirements have been met, the microlender will come to an approval decision. This could take just a few days (with alternative lenders) or a few weeks or longer (with SBA and non-profit organizations). Once approved, the loan will be distributed based on the lender’s policies.

Alternatives To Small Business Microloans

If you need a smaller loan but don’t want to go through the process of finding a microlender and applying for a microloan, there are alternative options available that could better fit your needs.

Business Credit Cards

If you don’t qualify for a microloan or would rather have access to your funds much more quickly, business credit cards may be the answer. Business credit cards are typically approved in just days and are often available to businesses with low credit scores.

Business credit cards can be used toward any business expense. The card can be used up to and including the credit limit set by the issuer. A business credit card can be used for startup costs, larger purchases, or as working capital. Interest is applied only to the portion of the credit limit that has been used.

It’s important for anyone getting a business credit card to understand the interest rates. Borrowers with lower credit scores will often be stuck with a higher APR, so it’s important to use these cards responsibly. Borrowers should also be aware of any fees that are associated with having the account to understand the true cost of using the card. As with any other financial product, credit cards should be used responsibly. This includes spending only when necessary and paying the balance down as quickly as possible to avoid paying years of interest.

Personal Loans for Business

Getting a business loan can be difficult, especially for startups and new businesses. Many banks and lenders will turn these businesses away because they don’t have a solid reputation. However, borrowers with high personal credit scores can consider taking out a personal loan for business.

With a personal loan, the history of the business, including its credit, will not be a consideration. Instead, the income and the credit score of the borrower will be used to determine eligibility. Some lenders do provide personal loans to applicants with low credit scores, but these loans can often be very expensive because of high interest rates.

Invoice Financing

If unpaid invoices are causing cash flow issues, a conventional loan isn’t the only solution. Instead, businesses can look to invoice financing to resolve these cash flow challenges.

There are two different options to consider for invoice financing. The first is invoice factoring. A lender will pay a percentage of the unpaid invoice to the borrower. The lender will then collect from the customer. Once the invoice has been paid, the remaining amount will be paid to the borrower, minus fees and interest charged by the lender.

Invoice discounting is the other option. A large percentage of the invoice is paid to the borrower by the lender. The borrower collects payment from the customer and pays back the loan, along with interest and fees.

Invoice Financing Invoice Factoring

Uses invoices as collateral for a line of credit

Sell invoices for immediate cash

You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time

Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)

You are responsible for collecting invoice payments

Factor is responsible for collecting invoice payments

Invoice financing is best for businesses that have unpaid invoices and need cash immediately. The invoices serve as the collateral for the loan, while credit requirements are not as strict as with other loan options.

Final Thoughts

Microloans can provide much-needed funding for small businesses that have faced challenges when applying for other types of loans. While these loans can certainly help a business get off the ground or overcome financial hurdles, as with any loan, be aware of the costs of the loan to ensure there will be a return on investment and compare all of your options to ensure you’re making a sound decision for your business.

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