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Unexpected expenses can wreak havoc on a small business, as can a period of stagnant or slow cash flow.
When the bills are due or a financial emergency strikes, smaller companies may find it difficult to acquire the capital they need quickly. Microloans for small businesses can be a viable option when more conventional financing solutions aren’t the answer.
Microloans are available for smaller dollar amounts with shorter repayment terms. Because of these features, they work well for businesses pinched by cash-flow with expenses piling up.
However, microloans for small business are not the best choice for every business owner. It’s important to understand what microloans are, how they work, who qualifies, as well as alternative options.
We take a look at some of the top lenders in the microlending space, while providing answers to common microloan questions.
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Top Microloan Lenders for Small Businesses
Microloans for small business are not available through all business financing companies. However, there are several options for small business owners.
The two broad categories of microloan lenders are non-profit and for-profit financial institutions, each of which carries benefits and downsides. Non-profit microlenders offer loans of up to $50,000 in most states, through a partnership with the the U.S. Small Business Administration. These lenders operate as non-profit, community-based organizations that work as intermediaries between the SBA and the small business in need of financing. A list of SBA microloan lenders can be found here.
For-profit microloan lenders operate as more traditional financial institutions, without a partnership with the SBA directly. These microloan providers offer similar loan amounts as non-profit lenders, but interest rates, repayment terms, and qualification requirements vary.
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A few examples of non-profit and for-profit microloan lenders include:
As a global non-profit organization based in New York, Accion offers microloans of $300 up to $50,000. The lender offers repayment terms ranging from six to 50 months, depending on the amount of the loan. Small business owners must have a minimum personal credit score of 575 to qualify, as well as proven cash-flow.
Another non-profit option for microloans is LiftFund, which offers small-dollar loans from $500 up to $1 million. Repayment terms vary from loan to loan. Small business owners who qualify have a personal credit score of 575 on average, according to the organization’s website.
PayPal Working Capital
Many small business owners are aware of PayPal’s transactional services, but the for-profit company also offers microloans to qualified small businesses. Through PayPal Working Capital, microloans are available from $600 up to $60,000 without a personal credit check. PayPal instead uses a business owner’s PayPal sales to determine loan eligibility. Microloans from PayPal Working Capital are repaid through a percentage of PayPal sales.
As a global organization, Kiva is a non-profit microlender that offers small-dollar financing to small businesses around the world. Kiva does not charge interest on its loans, but all approved loans are backed by Kiva contributors. Repayment of the loan varies based on the amount. Even small business owners with bad credit history may qualify.
Microloans for Small Businesses Explained
What Are Microloans?
Microloans for small business are small-dollar loans available to qualified companies, with funding from $500 to $50,000. As a loan in the traditional sense, a small business microloan provides a lump sum amount of cash to a small business. They require monthly or weekly fixed payments of principal and interest. Microloans are a smart choice for businesses that want predictable repayment terms, but may not qualify for a larger bank or credit union business loan.
Microloans can be a good option for companies just getting off the ground, as well as businesses that need a minimal cash infusion to cover short-term expenses. Most small businesses utilize a microloan for purchasing inventoryor office supplies, furniture or small equipment, or making improvements to office space.
How to Qualify for a Microloan
Although a microloan for small business is often easier to acquire than a traditional small business loan, there are still eligibility requirements to qualify for funding.
First, small businesses must have a solid business plan that outlines future cash-flow and total revenue. Small businesses may also be required to show up-to-date financials that will show the ability to repay the loan over time. Some microlenders may also pull a business owner’s personal credit history to ensure there are no significant negatives, like judgments, bankruptcies, or collection accounts. However, microlenders are often willing to approve a loan application even with less than ideal credit history.
Additionally, small businesses interested in securing a microloan for their company must be a for-profit company in most cases. They usually must also have the majority of their operations within the United States. Small businesses may also have to prove that they cannot qualify for other business financing, or that they are independently owned and operated, with or without investors.
Microloans for small business have several benefits. The most notable advantage is the ability to receive a small amount of financing quickly.
Most microloan lenders approve loans within a few days, and some can approve in as little as a few minutes. Microloans do not require strong personal credit history or score, or the pledge of any personal or business asset to secure the small-dollar loan.
Microloans from non-profit lenders may also have lower interest rates and minimal funding fees, compared to business financing alternatives. These benefits make microloans a valuable financial tool for companies that cannot qualify for larger loans, or have no need for a larger loan amount.
Although small business microloans are beneficial in some instances, they are not appropriate for every small business owner.
This is because microloans often come with a personal guarantee requirement. That means the business owner is personally responsible for repaying the loan if the business cannot. Additionally, some microloan lenders require collateral to secure a loan, particularly for businesses that have minimal cash flow or those that are relatively new. Microloans may also have higher interest rates than traditional lending options, such as bank and credit union business loans.
These caveats can make microloans an ill-fit solution to short-term financing needs for some businesses.
Alternatives to Microloans
When small business microloans are not the best answer to financing needs, companies may venture out to other short-term options for funding, including merchant cash advances, invoice factoring, or business credit cards.
While these alternatives each offer some flexibility in eligibility requirements (often less stringent than microloans), they typically carry higher interest rates.
Merchant cash advances may work well for businesses with strong credit card sales each day. Invoice factoring is an option for companies with outstanding invoices from customers. Business credit cards, on the other hand, can work for just about any small business, however funding there may be limited.
Microloans for small businesses can benefit companies with quick access to funding, predictable repayment terms, and relatively low interest rates.
However, microloans do often require a personal guarantee, and some businesses may not qualify based on their time in business, revenue, or purpose for the loan proceeds. There are several alternatives available, but each is likely to have a higher total cost and less flexible repayment terms.
When small businesses cannot qualify for traditional bank or credit union business loans, considering a microloan for small business capital needs can be a cost-effective choice.