Small Business Financing 101: What Are Microloans?
You’re a small business owner who needs funding. Quick! What’s the first source of capital that comes to mind?
A bank loan? A line of credit? Tapping your credit card?
Those could be realistic options — but for newer companies or those with limited credit history, they might not be as accessible as you’d think. And if you ever find yourself in that situation, you’ll want to be mindful of alternatives, including microloans.
Let’s dive into the basics of microloans, how they work, and how you can determine whether they make sense for your small business.
What Are Microloans?
Microloans broadly are small, short-term loans designed specifically to help small businesses, entrepreneurs, and certain nonprofits with modest capital needs. But often, the term “microloan” refers to microloans issued by nonprofit and community organizations that receive funding from the U.S. Small Business Administration (SBA) to extend those loans. They typically range from a few hundred dollars to $50,000, with the average U.S. microloan hovering around $13,000, according to the SBA.
A microloan can be a lifeline for startups, solo operations, and businesses owned by women, minorities or veterans. And it can be used for just about anything, including:
- Purchasing equipment, inventory, or supplies
- Working capital or cash flow support
- Furniture or fixtures
- Business licensing or permits
- Marketing or website development
- Hiring and training staff
However, most SBA microloans can’t be used to pay off existing debt or purchase real estate.
Who Provides Microloans?
Unlike traditional business loans offered by large banks, microloans are typically SBA loans administered by nonprofit organizations, community-based lenders and certified development companies. Some of these lenders also offer financial education, mentoring and support services as part of the loan process.
The largest microloan program here in the States is the SBA Microloan Program, which provides funds to nonprofit intermediary lenders, who then issue loans to qualified small business borrowers. You can view a full list of providers on SBA.gov.
However, there are other microloan providers, such as:
- Kiva: Offers 0% interest crowdfunded microloans up to $15,000
- Accion Opportunity Fund: Focuses on underserved communities and businesses
- Grameen America: Supports women entrepreneurs in low-income communities
Microloan Terms and Rates
While each microloan provider sets its own lending criteria, most microloans are smaller in size (up to $50,000, though many are under $15,000), short-term (usually repaid within six months to fix years), flexible (including no collateral in some instances), and “supportive” in that they’re often accompanied by business training or financial counseling.
Interest rates on microloans can vary widely. The SBA’s microloan interest rates typically range from 8% to 13%, depending on the lender, loan size and borrower’s qualifications. While these rates may be higher than traditional business loans, they are generally more accessible to businesses that would otherwise have limited or no financing options.
Who Should Consider a Microloan?
Microloans are not a fit for every business, but they’re an excellent option for:
- Startups: New businesses that don’t yet have established credit or revenue history
- Underserved entrepreneurs: Those who have been historically underbanked, including women- and minority-owned businesses
- Sole proprietors: Freelancers, independent contractors, or consultants
- Businesses with small capital needs: Companies that only need a few thousand dollars to make a big difference
- Credit-challenged owners: Entrepreneurs who are rebuilding credit or can’t qualify for traditional financing
If you’re looking for a large amount of capital, or need funding for things like real estate purchases or debt refinancing, you’ll likely need to pursue other loan options.
Tips for Applying for a Microloan
When you apply for a microloan, you’ll want to be prepared the same way you would be when applying for any business loan.
For instance, be clear about how much money you’ll need, what you’ll use it for, and how it will help your business grow. Also, most microloan lenders will want to see a plan that outlines your business model, market opportunity, financial projections and strategy.
You’ll want to have financial documents on hand, including bank statements, tax returns, financial reports and proof of revenues. And you’ll also want to be ready to discuss your credit — not all microloan providers require excellent credit, but you should still understand your small business credit score and be prepared to explain any blemishes.
Need Help Finding the Right Financing Option?
Navigating small business financing can be tricky, especially when you’re juggling day-to-day operations. Whether you’re considering a microloan, a line of credit, or more traditional lending, expert guidance can help you find the right fit for your needs.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that serves small and midsize businesses. Our experienced consulting team can help you evaluate your financing options, build your financial case for lenders, and prepare the documents you need to move forward with confidence.
Call us at 440.892.8900 or contact us online today to learn how we can help you secure the funding your business needs to grow.
Tags: financial literacy, financing, loans, McManamon, McManamon & Co., small business, small business finances, small business financing, small business lending, small business loans | Posted in Small business finances