What is a Business Microloan – Explained
Microloans are comparable to regular business loans, but they are offered in smaller amounts, usually not exceeding $50,000. These are microloans for small business owners who have been turned down by traditional banks, as these banks are often reluctant to lend smaller sums of money.
Microloans are typically offered by nonprofit organizations and government agencies. These lenders might have certain criteria for eligibility and restrictions on how the borrowed money can be utilized. However, microloans generally come with more lenient conditions, lower interest rates, and fewer fees compared to traditional business loans.
Moreover, microloan programs often provide additional benefits that traditional banks, credit unions, or alternative lenders may not offer. These benefits may include entrepreneurship guidance and business-related classes. In some cases, the lender might even require the borrower to participate in training sessions as a part of the loan agreement.
Eligibility for microlending
Microlenders usually provide more adaptable terms for financing. For instance, they might consider funding your business based on your business plan and cash flow projections. However, microlenders often ask for collateral and the business owner’s personal guarantee as a requirement for the loan.
Every microlender seeks entrepreneurs with promising business ideas who face challenges in obtaining capital through traditional means. Microloans are particularly suitable for businesses with limited working capital and minimal credit history. They are often targeted at borrowers in underprivileged communities and countries, or given priority to minority business owners, female entrepreneurs, and individuals with low incomes.
What can Business Microloans be used for?
The usage of a microloan depends on the financing structure of the microlender. It can be utilized for various purposes, such as working capital, inventory or supplies, furniture or fixtures, machinery or equipment, and even real estate. However, it is important to note that microloans cannot be used for refinancing existing debts.
How to get a micrloan?
Follow these general steps to apply for a business loan if you think obtaining a microloan is the best step moving forward for your business:
1. Having a good credit score: While microlenders may not heavily rely on your credit score, it’s still beneficial to improve your personal credit score by paying down debts and disputing any errors on your credit report before applying for the loan.
2. Having the correct documents: Organizing your financial records will help expedite the application process. Ensure you include all necessary information on the loan application to avoid potential denials.
3. Prepare collateral or personal guarantee: Microlenders may ask for business assets as collateral to secure the microloan. Additionally, they might require a personal guarantee, making you responsible for repaying the microloan in case of business default.
4. Have a look at the options and prices: Carefully review each lender’s terms and conditions to select the most suitable option for your business. Utilize a business loan calculator to assess your borrowing potential, compare rates, and get an overview of the interest you’ll be paying.
Pros and Cons of Business Microloans
Microloans can present several advantages to borrowers; however, they may not always be the ideal financing option for every business. It is essential to ponder these factors before considering a small business microloan.
Pros:
- Flexible eligibility criteria.
- Priority given to minority and women-owned businesses.
- Access to small loan amounts, usable for various business purposes.
- Supplementary business resources like financial coaching and educational classes.
Drawbacks:
- Short repayment periods and possibly higher interest rates.
- Typically, collateral and/or a personal guarantee are necessary.
- Limited availability in certain regions or eligibility based on specific demographics.
- The loan amount might not be sufficient to support significant business growth.
Business Microloan programs
When seeking financing for your business, there are various options to explore. It’s important to note that the key distinction between a microloan and traditional financing lies in the “micro” aspect. If you anticipate requiring access to larger loan amounts, it might be wise to explore other alternatives.
Below are seven well-known microloan programs you can consider:
SBA microlenders
| Loan amount | Up to $50,000 |
| Term | Up to 72 months |
| Interest rate | 8.00% to 13.00% |
| Min. credit score | 620 |
| Collateral | Required |
| Availability | Nationwide |
The U.S. Small Business Administration (SBA) backs microloans up to $50,000, which are offered through intermediary lenders. The primary objective of the SBA microloan program is to assist emerging businesses in underserved markets and nonprofit child care facilities. While the credit requirements are generally more lenient than other lenders, collateral will still be necessary.
To initiate the application process with an SBA-approved lender, you can reach out to your local SBA district office or get in touch with an intermediary lender operating in your region.
USDA FSA microloans
| Loan amount | – Up to $50,000 for an operating loan – An additional $50,000 for a farm ownership loan |
| Term | – 84 months (operating microloan) – 25 years (ownership loan) |
| Interest rate | – 4.00% (operating loan) – 4.25% (farm ownership) |
| Min. credit score | Not required |
| Collateral | Required |
| Availability | Nationwide |
Microloans provided by the U.S. Department of Agriculture (USDA) are specifically targeted at small or beginner farmers and entrepreneurs in specialized sectors. These sectors may include farms that directly sell to consumers or those employing hydroponic or organic methods. The Farm Service Agency, under the USDA, offers both operating and ownership loans.
Kiva
| Loan amount | Up to $15,000 |
| Term | Up to 36 months |
| Interest rate | 0% |
| Min. credit score | Not required |
| Collateral | Not required |
| Availability | Nationwide, plus 80+ countries |
Kiva is a nonprofit organization that specializes in peer-to-peer microlending, particularly offering crowdfunded business loans in developing nations. For business owners in the United States, they can apply for a 0% interest microloan, with a maximum amount of $15,000, by demonstrating their creditworthiness through contributions from family and friends.
Similar peer-to-peer funding choices comprise Peerform, Prosper, and Funding Circle.
Upstart
| Loan amount | $1,000 to $50,000 |
| Term | 36 and 60 months |
| Interest rate | 4.60% to 35.99% |
| Min. credit score | 300 |
| Collateral | Not required |
| Availability | Range of availability varies by state |
While Upstart provides small business loans ranging from $5,000 to $200,000, if you need smaller amounts, you must apply for their personal microloan. Upstart’s microloan can be utilized for various needs like credit card debt, moving expenses, medical bills, and more.
However, it is important to note that using a personal loan for business purposes will not contribute to establishing business credit, and you will be personally responsible for the debt you acquire.
Accion Opportunity Fund
| Loan amount | $5,000 to $150,000 |
| Term | Customized repayment terms |
| Interest rate | As low as 5.99% |
| Min. credit score | Not publicly disclosed |
| Collateral | Not disclosed |
| Availability | All states except for Montana, North Dakota, South Dakota, Tennessee and Vermont |
Accion Opportunity Fund (AOF) is a nonprofit lender that provides small business loans to a diverse range of business owners. They offer funding options to ITIN-only borrowers, making it accessible to non-U.S. citizens. Additionally, AOF offers supplementary resources, coaching, and support in both English and Spanish.
Grameen America
| Loan amount | $500 to $2,000 for first-time loan |
| Term | 6 months |
| Interest rate | 15.00% to 18.00% |
| Min. credit score | Not required |
| Collateral | Not required |
| Availability | Must live within 15 miles from a Grameen America branch |
Grameen America, a nonprofit organization, provides microloans to empower women to break free from poverty through entrepreneurship. New borrowers can receive up to $2,000, while established members become eligible for higher loan amounts.
The program offers a complimentary savings account with a commercial bank, weekly meetings focusing on financial fundamentals, and assistance in building your credit history. To be eligible, you must reside within a 15-mile radius of a Grameen bank branch.
LiftFund
| Loan amount | $500 to $500,000 |
| Term | Varies based on personal credit score |
| Interest rate | 3.00% to 9.00% |
| Min. credit score | Not specified |
| Collateral | Required |
| Availability | Small business loans available in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, New York, Oklahoma, South Carolina, Tennessee and Texas |
LiftFund, another nonprofit organization, provides business loans that surpass the usual microloan limit. The loan amounts offered range from $500 to $500,000. Regardless of limited credit, collateral, or experience, the LiftFund team is prepared to support you in enhancing your business’s financial well-being. However, it’s important to note that LiftFund’s small business loans are not accessible in all states.
Conclusion
The world of microloans presents an array of opportunities for aspiring entrepreneurs and small business owners. With various nonprofit organizations and government agencies offering flexible terms and lower interest rates, microloans have emerged as a viable alternative for those unable to secure traditional business financing.
From specialized programs supporting minority-owned businesses to platforms that facilitate peer-to-peer lending, there is an extensive range of microloan options catering to diverse needs.
While microloans can open doors for growth and innovation, it’s essential to carefully assess individual business requirements and consider other financing alternatives if larger loan amounts are necessary. By leveraging the power of technology and innovative lending approaches, entrepreneurs can seize the potential of mobile business ideas and strive for success in the competitive market of 2023.