Microloans: Small Loans for Small Businesses
Microloans are, as the name implies, small loans – usually varying from $500 to $100,000. These loans may be more accessible to new businesses who may have trouble securing business loans from traditional lenders. Microloans may also help underrepresented groups including women, minorities, veterans and low-income small business owners.
What is a microloan?
Microloans and microcredit are a form of business funding that many people often associate with developing countries and particularly impoverished and disenfranchised populations. This may be due to the fact that microlending is generally considered to have originated in Bangladesh, where Grameen Bank founder Muhammed Yunnus began giving small loans to the rural poor decades ago. Such microloans, as Yunnus envisioned them, have many noble goals, including providing an alternative to loan sharks, supporting entrepreneurship, alleviating poverty, empowering women and by extension, uplifting entire communities. Yunnus even won the Nobel Prize in 2006 as a result of his work, and since then microloans have grown in popularity across the world.
Microloans are available in the United States for small businesses that may not have a substantial credit history and that find it difficult to secure traditional loans. The U.S. Small Business Administration operates a microloan program that provides loans of up to $50,000 to help small businesses start and expand, with an average loan amount of about $13,000. The SBA works with experienced nonprofit, community-based organizations to issue these loans. In particular, these microloans are designed to help women, veterans, minorities and low-income entrepreneurs grow their small businesses. In 2019, the SBA issued 5,533 loans to qualifying business owners.
Microloans can also be a good option for borrowers with limited credit histories.
“Microloans are more targeted to people who have trouble accessing traditional credit,” explains Joyce A. Klein, director of the Aspen Institute’s Business Ownership Initiative. “Microlenders tend to be more flexible then banks are. If someone doesn’t have great credit, if they have thin credit, not that they haven’t performed well, but rather don’t have an extensive credit history, then microlenders are more willing to look at other factors, such as the cash flow of the business.”
There are a variety of lenders that issue microloans, including lenders affiliated with the SBA as well as independent microlenders.
Grameen America is a U.S.-based spinoff of Muhammed Yunus’ Grameen Bank, based in Bangladesh. Founded with the premise that “the poor are creditworthy,” Grameen Bank offers microloans to individuals and entrepreneurs who might not otherwise qualify for them. Grameen America has a special focus on helping entrepreneurial women and their families.
LiftFund issues SBA 7(a) Community Advantage loans to small businesses in low- to moderate-income communities. These loans are designed to encourage business growth and job creation in these communities. LiftFund also issues its own microloans ranging from $500 to $250,000.
Based in California, Opportunity Fund issues microloans with a special focus on minority and women-owned businesses. Loan amounts range from $2,600 to $250,000. Opportunity Fund is committed to helping business owners and entrepreneurs succeed and offers a variety of financial resources and small business experts to provide counseling and advice.
Kiva is a micro-lending and crowdfunding platform with a focus on small businesses. Loan amounts of up to $15,000 are available at 0% interest. Kiva also allows borrowers to market their products to Kiva’s community of lenders. After borrowers are approved for a loan, they’re invited to prove their creditworthiness by inviting friends and family to lend to them.
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Required documents for a microloan
In order to apply for a microloan, you’ll have to develop a business plan that states what you hope to accomplish and what you plan to do with the loan amount. In some cases, you may be required to undergo training designed to help your business succeed before the funds are dispersed.
In order to qualify from a loan through the SBA, a business must
- Be a for-profit business
- Do business in the United States
- Have invested equity in the form of time and money
- Have exhausted other lending options
When applying for a loan, it’s a good idea to have documents and info about your business on hand. These include:
- Business name
- Business address
- Business annual revenue
- How you plan to use the loan
Before you apply, be sure that a microloan from the SBA meets your needs. These loans can be used for:
- Working capital
- Supplies and inventory
- Furniture and fixtures
- Equipment and machinery
A microloan from the SBA cannot be used to purchase real estate or to pay down existing debt.
Choosing the right microlender
In order to choose the right microlender for you, you should be sure to compare several different lenders in order to ensure that you’re getting the best deal possible. Many SBA-affiliated microlenders only issue loans for businesses in a certain state or geographic area. Other lenders target particular demographics, such as business owners who are women, minorities, veterans and other underrepresented groups.
The SBA website provides a directory of its participating lenders, which are located across the country. These lenders are nonprofit organizations that have experience in lending and in providing small businesses with technical assistance. Make sure to do your research on prospective lenders, and watch out for interest rates or fees that are higher than average. The best lenders will offer loans with an easy application process, low rates and few or no fees. The microlenders affiliated with the SBA may also offer additional services, such as small business training and expertise.
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