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Micro Loans For Small Businesses

If you’ve been thinking about taking out a business loan, you’ve likely come across a ton of new terminology to learn. One of which is a microloan.

What Is a Microloan?

The simple microloan definition is: “a small sum of money lent at low interest to a new business.”

To be more precise, a microloan is a short-term loan, of a particularly small amount of money, lent to small businesses, especially those with few employees, startups, and the self-employed.

A small business microloan offers amounts ranging from $500 to $50,000, with varying terms and interest rates, which can be used for a wide range of purposes, although some lenders will place restrictions on this depending on the loan. Some examples are:

  • Funding a startup
  • Working capital
  • Training or paying employees
  • Seasonal expenses
  • Financing marketing strategies

The most common microlenders are nonprofit organizations that focus specifically on lending to women, minorities, veterans, and business owners from underserved communities.

How To Get a Microloan For Small Businesses

When you are looking at microloans for small businesses, it is beneficial to start in your local area. Many of the nonprofits that offer small business microloans are strongly linked to their local community, so will only accept an application from a business in their community or state.

These nonprofits also rely largely on donations, grants, or government guarantees to be able to offer microloans, so they may only have a certain amount of money to give out to borrowers each year. This is why it’s important to make your application stand out, which we will talk more about below.

Microloans For Startups

Microloans are popular for startups as they are typically much easier to qualify for than a traditional loan. However, you still need to look at your options carefully to ensure you get a good deal, and that you meet their requirements, such as length of time in business.

If you have a low credit score when you first start your business, a micro business loan is a great way to build up your credit score so that you will be able to qualify for better financing options in the future.

How To Qualify For a Microloan

Every microlender has different qualification requirements. However, they will typically determine your eligibility through your credit score, the age of your business, and your business revenue and other sources of income.

There are a few ways in which you can work to boost your chances of approval:

Create a Strong Business Plan

The most important thing when applying for any loan is to ensure that you have a solid business plan in place. This should provide information regarding your business, including your business goals, where your revenue comes from, any stakeholders or suppliers, and your marketing strategies.

A business plan is how microlenders will determine how successful your business is likely to be, and therefore whether you will have enough income to make your payments on time.

Have a Clean Credit Report

Although microlenders will not focus on your credit history as much as traditional loan lenders, as microloans are essentially a “starter” loan, you should still ensure that you have a clean credit report. This will increase your chances of being approved for a microloan, and your interest rates are likely to be lower.

Be Ready to Offer Collateral or Sign a Personal Guarantee

If you are required to offer collateral, you will have to guarantee a personal asset/s that can be seized and liquidated if you are unable to make your repayments. While this is often a scary step, it will allow the lender to offer you more money with more confidence.

Some microlenders will ask for a co-signer.

The Best Microloans For Small Business Owners

Here is a selection of some of the best microloans available for small business owners.

SBA Microloans

Rather than offering microloans directly, the SBA offers microloans through community-based nonprofit organizations. These intermediaries offer amounts up to $50,000, with repayment terms of up to 6 years, and interest rates ranging from 7-13%.

You will also be provided with education on how to set up or grow into a successful business through technical assistance or help with management.

The exact terms of your microloan will be decided by the specific intermediary lender and will depend on the size of the loan, how you plan to use the funds, and what the lender expects.

Learn More About SBA Microloans

Loan Amount: $30,000 – $350,000
APR Range: 9.7% – 11.04%
Time To Fund: Typically take several weeks to fund, but can fund as quickly as within seven days.
Loan Term: Maximum loan term is 10 years.
Origination Fee: 4.00%
How To Qualify: 675+ Personal credit score
$50,000+ Annual revenue
Great Option For: Borrowers with good credit
SBA loans
Funding real estate purchases
Refinancing debt
Credit Check? Soft credit check and hard pull
Co-Applicants Accepted? No cosigners
Direct Pay-Off To Creditors? No
Click “Check Rates” to apply to SmartBiz

» MORE: SmartBiz SBA Loan Review

Accion USA

As the country’s most extensive network for microlenders, this nonprofit organization works globally to provide small business owners with the finances they need, as well as the education they need to grow a successful business.

Accion USA works similarly to the SBA microloan program, but their funds are acquired from various sources. Although their main focus is on microlending, they do, in fact, offer loan amounts of up to $1 million.

Requirements may be slightly different depending on which branch of Accion you make your application with, but to qualify you need:

  • a credit score of 575+
  • have had no bankruptcies in the past year
  • have had no foreclosures in the past 2 years
  • have no more than $3,000 of unpaid tax liens
  • a co-signer if you’re a startup business

Kiva

Kiva is another global organization that provides microloan amounts of up to $10,000. Their repayment terms range from 3 to 36 months and, unless you select a loan from one of their partner organizations, their loans are interest-free due to crowdfunding by individual lenders. You will, however, need a family member or friend to lend to your business venture to qualify.

LiftFund

As well as being a top microlender in its own right, LiftFund is one of the top intermediaries in the SBA Microloan program. They offer microloans from $500, and loan amounts up to $1 million. Financing from LiftFund can be used for a variety of purposes, including (but not limited to), equipment, inventory, startup capital, and real estate.

To qualify, you must:

  • have collateral equal to the loan amount
  • have no active bankruptcies
  • have no unpaid tax liens
  • if you are a startup business, you must have another source of income

Grameen America

Grameen America offers microloans to female entrepreneurs of low-income, whether they are looking to start a new business or expand an existing one. They do, however, work a little differently to other microlenders.

You have to find four other trusted women that you want to work with as a group. You must all then take part in a weeklong, financial training seminar. Once it has been completed, each woman must open a savings account to receive their microloan, which will help them to build up their small business. Each week, the group needs to meet to make repayments on the loan and have further financial education.

Grameen America microloan interest rates start at 15%, but there will be no additional fees. They are a great way to build up your credit score as they regularly report to credit bureaus, and the additional training is a great foundation for your future as a business owner.

Opportunity Fund

Opportunity Fund works to provide loans to small business owners who are struggling to qualify for traditional financing, particularly females and minorities. They are localized to California and Nevada, although they do have some select loan options available in New York and Washington, so check in to see if they offer funding near you.

They offer loans from $2,600 to $250,000 with repayment terms ranging from 1 to 5 years. This micro business loan funding can be used for various purposes including, equipment, working capital, commercial vehicles, debt refinancing, tenant improvements, purchasing another business, or opening a new location.

They boast a particularly quick application process, with approval in as little as 3-5 working days.

Microloan Interest Rates

Exact terms of microloans, including interest rates, borrowing amounts, repayment terms, and added fees, are decided by the lender, so vary significantly from lender to lender. It is extremely important to compare your options carefully before making a decision. (You can do that with us – click here to get started.)

Some of the individual interest rates were outlined above, but you can expect small business microloan interest rates to range anywhere from 5% up to 20%, with repayment terms of only 3 months, up to as much as 7 years.

Alternatives to Business Microloans

If, for any reason you are unable to get a business microloan, you can alternatively get a personal loan. You will be able to find lenders that will accept businesses that are less than a year old, so they are perfect for startups, and you can find options for bad credit, fair credit, and good credit so you will be able to find several options. As always, just make sure you do your due diligence and compare interest rates, repayment terms, and requirements before making a decision.

A small business microloan can be a great way to get financial help if you are unable to get more traditional methods of funding. Microloans can help you to build up your credit score so you will be better qualified for these traditional loans in the future. If you’re ready to compare business loans, click here.

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