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Microloans: What Are They and How Can Your Business Get One?

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Microloans are generally loans of $50,000 or less. Microloans for small businesses can present a funding solution for entrepreneurs who have trouble getting traditional loans from banks, which are typically unwilling to lend small amounts of money. If your business needs a small infusion of capital and you don’t qualify for bank financing, you may be able to find relief in a microloan.

What is a microloan?

A microloan is a small sum of funding typically reserved for startup companies launched by business owners with little or no, even damaged, credit history, as well as women and minority entrepreneurs, and low-income borrowers who don’t qualify for conventional business loans.

Nonprofit organizations and government agencies are common microloan providers. Some groups may restrict the way funds are used or limit who qualifies for financing. Still, microloans often come with flexible rates and terms, and fewer fees than traditional business loans. You also might find other services that you wouldn’t get at a bank, credit union or alternative lender, such as mentorship and business classes. In fact, you might be required to attend training as part of your loan agreement.

Is microlending a good fit for your business?

While microloans are open to any business that meets the eligibility requirements of a particular lender, some entrepreneurs may be better suited for microloans as their main form of business financing:

  • Startups or early-stage businesses that require little capital
  • Businesses that want to use a microloan to build credit for a larger loan in the future
  • Low-income entrepreneurs

Types of microloans

You can find microloans from a number of institutions. Here are a few common types of microloans that you may come across during your search for financing.

Types of Microloans
Loan Amount Terms Maximum Rate Requirements
SBA Microloans Up to $50,000 Up to 7 years $10,000 or less: 8.5% + intermediary’s costs
More than $10,000: 7.75% + intermediary’s costs
Meet SBA requirements; use proceeds for working capital or acquisition of supplies or equipment
USDA Microloans Up to $100,000 when combining ownership & operating loans Up to 25 years (7 years max for operating microloans) 2.25% for ownership loans; 1.25% for operating loans At least some farm experience required
Private Microloans $300 to $500,000+ Varies 0% to 34% Flexible credit requirements and terms, but offers may depend on your location and other factors

Government microloans

There are two primary types of government microloans: SBA microloans are available to urban and rural entrepreneurs, while USDA microloans are primarily aimed at farmers. Unlike some nonprofit microloans, you wouldn’t have to demonstrate community impact with a microloan from a government agency.

SBA microloans

The U.S. Small Business Administration guarantees microloans up to $50,000 made through intermediary lenders. The SBA microloan program targets early stage businesses in underserved markets, as well as nonprofit child care facilities. In 2019, 5,533 small businesses received an SBA microloan worth an average $14,735 at an average interest rate of 7.5%. The SBA does not charge any guaranty fees for microloans. To apply with an approved SBA lender, you can contact your local SBA district office or contact an intermediary in your area.

USDA microloans

Small business owners in the agriculture industry could benefit from two types of microloans from the U.S Department of Agriculture’s Farm Service Agency: Farm operating loans and farm ownership loans. USDA microloans are set aside for small or beginner farmers, or business owners in niche sectors, such as farms selling directly to consumers or those using nontraditional growing methods, like hydroponic or organic methods. You can find the USDA microloan application online.

Private microloans

Private financial institutions, such as nonprofit lenders and community development financial institutions (CDFIs), are also sources of microloans. Borrowers may need to meet the nonprofit’s specific criteria and be able to impact their surrounding area with the loan they receive. CDFIs also aim to make positive changes in local markets, typically issuing microloans to business owners in underserved communities to boost economic development. Rates can range from zero-percent-interest loans to rates nearly as high as you might find at alternative lending institutions.

Alternative lenders

Though technically not microloans, you could find small loan amounts from online nonbank lenders — the benefits would be fast time to funding and flexible credit requirements, but you might have to meet certain time-in-business or revenue requirements. Rates and fees would most likely be higher than those from a nonprofit or CDFI lender.

Where to find private microloans

If you’re considering applying for a microloan to fund your small business, here are a few microfinance organizations to help you get started.

Grameen America

Grameen America, a nonprofit organization, disburses microloans to help women escape poverty by way of entrepreneurship. Microloans are available between $2,000 and $15,000 at interest rates between 15.00% and 18.00%. As part of the program, members also have access to financial training and a savings account with a commercial bank. Grameen America also reports microloan payments to Experian to help borrowers build their credit profiles. The organization has a presence in 15 major cities across the U.S.

LiftFund

LiftFund, also a nonprofit organization, offers business loans exceeding the typical microloan cap. LiftFund loans are available between $500 and $500,000, though it also offers other types of loans that may allow access to even more money. Interest rates may go up to 15.00%. LiftFund focuses on small and microbusinesses, as well as entrepreneurs with little experience. These borrowers are typically too risky to qualify for bank financing. LiftFund works with business owners throughout the Southeast.

Accion

Nonprofit lending network Accion offers small business loans between $300 and $250,000 at fixed rates between 7.00% and 34.00%. Accion provides loans for women-owned businesses, minority-owned businesses, startups, veteran entrepreneurs and business owners who have disabilities. Accion serves businesses along the East Coast and in Southern California, Illinois and Indiana.

Kiva

Nonprofit lender Kiva specializes in providing crowdfunded business loans to entrepreneurs in developing countries. However, U.S. business owners can also apply for a 0% interest microloan up to $15,000 — you’ll have to prove your creditworthiness by raising a certain amount of funds from your own network of friends or family. Kiva aims to help community-focused small business owners who cannot qualify for affordable financing. Although the loans are crowdfunded, borrowers are expected to repay their debt.

Microloans: Pros and cons

Microloans could offer a number of benefits to borrowers, but they could come with strings attached. Consider these points before seeking a small business microloan.

Pros

 Lenient eligibility requirements. Microloans can be a viable lending option for businesses that don’t meet the credit or revenue requirements for traditional bank loans.

 Small loan amounts. Not all businesses need large amounts of capital to thrive — some might need less than $50,000, in which case a microloan would be a good fit.

 Extra business resources. A microlender may also offer additional services, such as business development or consulting.

Cons

 Limitations on borrowers. A microlender may prioritize business owners from certain regions or social demographics. As you research options, review each lender’s requirements.

 No large expenses. If your business needs more than $50,000, you’ll likely need to consider a different type of business loan. You could borrow a microloan to build and develop a lending history, then get a larger loan later. Some nonprofit lenders do offer greater loan amounts.

 Varying interest rates. Depending on the microlender you choose, you may have a higher rate than you would with a traditional bank loan.

Microloan eligibility

Each microlender has its own criteria to determine borrower eligibility. Some lenders may only work with businesses in specific geographic areas or industries, or business owners who fit certain demographics.

Generally, credit requirements are less stringent for microloans than they are for other types of business loans, since microloans are designed for small or growing companies that might not have had the chance to build up much credit or may have damaged credit. Lenders would consider credit scores in the overall context of the loan application.

Elements of your business, like a strong business plan or the management team’s past success, might offset poor credit. Serious financial issues like recent bankruptcies, however, may disqualify your business from receiving a microloan.

Tips for qualifying for a microloan

The more you can prepare before applying for a microloan, the better your chances may be of qualifying for financing. Here are a few tips to help you get the business loan you need.

Review your credit history.

Although microlenders may not heavily rely on your credit score score when reviewing your application, you should still make sure your personal credit profile is in good shape. Try to pay down your debts and dispute any errors on your credit report before submitting a loan application.

Gather your financial documents.

Spend time researching what individual microlenders require from applicants. Organizing your financial records ahead of time would help ease the application process. If you miss anything on the loan application or forget to include required information, you may not be approved.

Be prepared to provide collateral or a personal guaranty.

A microlender may require borrowers to offer business assets as collateral to secure a microloan. A personal guaranty may be required in addition to, or instead of, collateral. For instance, both collateral and a personal guaranty may be required for an SBA microloan. A personal guaranty would make you personally responsible to repay the microloan if your business defaults.

 

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