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During the COVID-19 pandemic, you know how challenging it can be to monitor cashflow, payroll, and other business expenses, not to mention ensuring the wellbeing of your valuable staff and loved ones. With so much to consider, you may need support for your small business. After recent months at a stalemate, Congress has finally agreed on another round of Paycheck Protection Program (PPP) funding for small businesses, which is now part of the CARES Act passed by Congress in March 2020.For many small business owners, the process of accessing capital for starting or supporting a newer business can be daunting. Many banks don’t lend to newer businesses because they see it as risky or perhaps there’s limited profit to be gained. Yet, this leaves potential borrowers with limited options for funding, which might be required for working capital and other startup costs.Thankfully, with the growing trend towards microlending, small business owners can obtain loans, typically up to $50,000, to help them get established and grow. While microloans are small, they are often exactly what small business owners need to cover essential costs associated with launching their business.There are a number of ways for business owners to apply for microloans, including through Small Business Association (SBA) loans, nonprofits, and alternative lenders, but it’s important to understand the different types and how they work to help ensure that you choose the one that best aligns with your business needs.
What Is a Microloan?Generally, microloans are loans for $50,000 or less, with SBA microloans averaging at $14,735 in FY2019. Microloans for small businesses are typically offered by nonprofits, government agencies, or individual lenders to be used for a variety of business expenses. Microloan programs can differ with focus on specific types of businesses, such as female entrepreneurs, underserved communities, or veterans. Some microloans specify that funds be used for specific purposes. Microloan uses may include:
In addition to lending money, some microloan programs offer assistance with things like marketing, financial counseling, training, and technical assistance to support budding entrepreneurs. For new business owners, this support can be valuable to help them responsibly use capital and plan for the future of their business.
- Working capital
- Inventory or supplies
- Furniture or fixtures
- Machinery or equipment
- Seasonal expenses
Common Microloan Rates and TermsMicroloan interest rates and terms vary from lender to lender and depend on the type of loan program and the individual borrower’s qualifications. However, they are generally offered as monthly installment loans at interest rates between 5% and 20%. Terms can vary from a few months to six or seven years.Factors that may contribute to loan repayment terms include:
While there are other loan products that small business owners may be able to access, microloans may be a more predictable and sustainable lending option compared to merchant cash advances, which typically have high borrowing costs and less regulatory oversight.
- Loan amount
- How funds will be used
- Specific lender requirements
- Needs of the borrower
Types of MicrolendersTo find the right microloan for your business, it helps to understand the different types of microlenders. Many lenders offer microloans in addition to other loan programs, while some lenders specialize in microlending to specific communities. Below, you’ll find information on different kinds of microlenders and generally how a microloan works for each type.
SBA MicroloansThe SBA’s Microloan program provides direct, government-backed loans to intermediary microlenders who can then offer borrowers necessary funding and training to start and run a small business. Loans can be up to $50,000 with some programs specific to women, veterans, and other underserved communities.Terms and conditions are negotiated directly with the intermediary lender, not the SBA, but general SBA microloan interest rates and terms are: For more information on where to find a local SBA intermediary lender or get more information about microloans, contact your local SBA District Office.
Peer-to-Peer (P2P) MicrolendersPeer-to-peer (P2P) business lending has grown in popularity in recent years and allows borrowers to access capital directly from other individuals (investors), without a financial institution acting as a “middle man.” Using online platforms to connect, borrowers can often find funding quickly from lenders who want to invest. For small business owners with little or bad credit, P2P lending may be a useful resource for accessing microloans. Many investors don’t require the same level of qualifications that a bank or credit union does (like collateral or good credit), but it’s still important to research P2P lenders and their terms and conditions to ensure they meet your business needs and financial outlook. If you’re interested in pursuing a P2P microloan, you may want to check out LendingClub. Their fast and easy application process and generally positive track record of helping small businesses secure funding makes them one of our top picks. Additional examples of P2P microlenders are:
- SoLo Funds: Their goal is to offer affordable access to loans by connecting borrowers and lenders on their mobile marketplace. Borrowers set their own repayment terms and lenders get to diversify their loan portfolios.
- Kiva: A form of crowdfunding in which lenders can support borrowers from around the world who can’t otherwise access capital to support their business. Borrowers are often artisans, students, shopkeepers, or restaurant owners.
Mission-Driven Microlenders Many microloans are offered by mission-driven lenders who desire to support specific communities and people groups with economic and entrepreneurial opportunities. These microlenders can be nonprofits and/or Community Development Financial Institutions (CDFIs), which specifically support low- and moderate-income communities. A few examples of types CDFIs include:
Some microlenders actually maintain CDFI certification, which tells borrowers that an institution is committed to the principles of CDFI. Examples of certified CDFIs and affiliates include:
- Community Development Banks
- Community Development Credit Unions
- Community Development Loan Funds
- Community Development Venture Capital Funds
The U.S. Department of the Treasury also offers a complete list of CDFIs for borrowers who prefer to apply with microlenders who have CDFI certification.
- LiftFund: Provides credit and services to those who don’t have access to funding from commercial sources like a traditional bank.
- Accion: Partners with three certified CDFIs to serve small businesses in communities across the U.S.
- Grameen America: Committed to supporting entrepreneurial women and their communities
- Opportunity Fund: Mission to help underserved small businesses, particularly those owned by low- and moderate-income immigrants, people of color, and women.
Online and Alternative LendersAlternative small business loans are those offered by individuals or lenders that aren’t a traditional bank. Alternative microlenders may include:
If you’re looking for fast access to funding, online small business lenders may be the microloan resource you need. Loans from online lenders may also be easier to qualify for compared to traditional bank loans, which could be helpful for a business that’s less established or for borrowers with little or no credit.
- Crowdfunding sites
- Online small business lenders
- Angel investors
- Venture capitalists
- Friends and family
Pros and Cons of MicrolendingFor small business owners, microloans may be a vital part of their business success. Yet, even with the advantages, there are some potential risks to be aware of before applying for microloans. Here are some typical pros and cons:
How do I Get a Microloan?Before you apply for a microloan, it’s important to research microlenders and have a thorough understanding of your business financials and goals. The following basic steps may help you prepare to apply for a microloan:
1. Creating a business planA business plan is helpful when planning for your future and may even be required by some microlenders. Taking time to make a formal business plan will help you assess your needs as you seek out funding. Generally, a traditional business plan includes:
- An executive summary, which is a high-level overview of your company’s:
- Product or service offering
- Leadership team
- Mission statement
- Goals for the future
- Growth plan
- A company description, which should include details on:
- The problem your product or service solves, and for whom
- What differentiates you from the competition
- Your location and team members
- Market research, to include:
- What the competition is doing well
- Where the competition is lacking, and how you can fill those gaps
- The trends and themes in your industry
- Deeper insights on your target audience
- Your company structure, including:
- How your business is legally structured (e.g. LLC or sole proprietorship; S or C corporation)
- An organizational chart of all the team members, outlining their reporting and managing duties
- Details on your product or service, like:
- What’s currently being done for research and development
- What copyrights or patents you hold
- The lifecycle of your product or service
- Marketing and sales strategies, which should:
- Coincide with your short- and long-term financial goals
- Be as specific as possible, listing individual steps from customer attraction to retention
- A funding request, which should include specifics on:
- How much money you need
- How you intend to spend the money
- Desired repayment terms
- Whether you want to offer equity or debt
- Your financing projections, which should include:
- Projected income statements, balance sheets, cash flow statements, and capital expenditure budgets for the next five years (include charts and graphs)
- Correlations between your funding request and marketing and sales strategies
- Income statements, balance sheets, and cash flow statements for the last three to five years, if possible
- An appendix, where you can include any supplemental documents to support your plan
2. Determining eligibilityMicrolenders will have their own eligibility requirements depending on the loan program and lender, but in general, small businesses should meet the following criteria:
- Be the sole business owner or co-owner of a for-profit small business
- Have no recent bankruptcies, late payments, outstanding tax liens, or foreclosures
- Have the ability to repay the loan with current income/revenue
- Proof of good payment history with creditors
- Have a clear, strong business plan for the future
- Meet any special demographic requirements (e.g. veteran, minority, low-income), when applicable
3. Choosing a microlenderAfter conducting research based on your business plan and needs, it’s time to choose a microlender. Narrow your search and consider the loans you are eligible for and want; each lender will perform a hard credit pull when you apply, which affects your credit score. Too many hard pulls may adversely affect your credit score and, thus, your chances of getting approved for a microloan.
4. Gathering documents and informationLenders may have different document requirements, so have the following ready to provide with your application or upon request:
Having these basic documents ready, could help streamline the application process should you choose to apply for a microloan. Work with your chosen microlender to ensure they have all the information they need from you.
- Government-issued ID
- Proof of income
- Business and personal financial statements
- How you’ll use the microloan
- A detailed business plan
- Proof of collateral, if applicable
- A list of references who can vouch for you personally and professionally
Alternatives to MicroloansIf you’re looking for additional funding options, the following types of small business loans may be helpful for both short- and long-term financing.
Commercial Real Estate LoanA commercial real estate loan is used to purchase or improve a building that’s specifically for business use. These typically involve a longer approval process and require good credit.
Working Capital Loan A working capital loan is any loan product that covers everyday expenses like payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage cash flow fluctuations.
Restaurant LoansRestaurant loans can be helpful when starting or expanding a restaurant business. They are offered by various types of lenders and typically can be used to cover short- or long-term expenses.
Franchise FinancingIf you are purchasing a franchise, a franchising loan can help to cover costs associated with opening a new location. While you can find franchise loans from various types of lenders, there are also franchise companies who specialize in this type of funding.
Merchant Cash Advance A merchant cash advance provides borrowers with cash up front with repayment coming from a percentage of the borrower’s future credit card sales. Automatic withdrawals can be set up to be debited directly from your bank account on a daily or weekly basis.
Inventory FinancingInventory financing loans are asset-based and used to purchase necessary inventory, which helps manage cash flow while keeping inventory stocked. The inventory serves as collateral and lenders base financing on a percentage of the inventory’s value.
Invoice FactoringInvoice factoring offers cash up front in exchange for unpaid customer invoices. Typically, the factoring company (lender) is responsible for collecting on unpaid invoices.
Business Line of CreditA business line of credit is a short-term loan option that gives borrowers access to cash up to a set credit limit determined by the lender. Interest is paid on the money withdrawn from the credit line. Some lines of credit are revolving, while others end once you use and pay off the full loan amount.
Equipment Financing An equipment loan is used to purchase business equipment. The length of the loan is typically equal to the expected life span of the equipment. The equipment acts as collateral for the loan. Rates may vary depending on the type of equipment, industry, and qualifications.There are pros and cons to each of these alternatives, of course, that you’ll want to look into as you do your research to find the right funding option for your business.
Compare Microlenders with Lantern Credit When you’re just starting your business or need a boost as a newly established business, you need access to reliable funding. With so many loan options, it can be overwhelming to choose the right one, which is why we want to make it easy to compare and choose the right microloan for your business. At Lantern Credit, we help simplify the process of finding lenders so you have more time to manage your business, grow, and succeed. With just a few clicks, you instantly get access to a variety of small business financing options all in one place.
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