Microloans Guide

Having cash flow problems? A microloan can help your business get back in the game

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Having cash flow problems? Consider a microloan for your small business

There are many reasons to consider microloans as a funding solution for your business. Whether you’re facing an urgent cash flow gap or want to invest in marketing and expand your operation, a microloan can help. While traditional bank loans have higher borrowing limits and lower interest rates for business owners, they’re also harder to obtain, especially if your business is just starting out. If you don’t have a credit record or otherwise don’t qualify for a loan from a bank, a microloan could help you get the funds you need.

In this guide, we’ll discuss everything you need to know about microloans, including:

  • What microlending is

  • How microloans work

  • Why your business may need a microloan

  • How to use a microloan

  • How to qualify for a microloan

  • The pros and cons of microloans

  • Where to find a certified microloan lender

  • How to apply for an SBA microloan

  • Alternative funding sources for your small business

What is microlending?

Microlending is the practice of giving small loans to businesses in need. A subset of micro finance, microlending is designed to support business owners who either don’t have access to business funding or can’t get loans from traditional financial institutions because of their credit scores.

Microlending for small businesses has become popular thanks to peer-to-peer (P2P) lending platforms, dedicated micro finance institutions (MFIs), and local micro lenders.

What is a microloan?

Micro business loans, as the name suggests, are small term loans. Depending on where you live, a microloan can be as small as a few hundred dollars or as large as $50,000 (as in the US). Businesses can use microloans in their early stages to pay for inventory, machines, office and business supplies, equipment, and working capital. In the US, most microloans are low-interest, short-term loans provided by business-friendly lending organizations, such as small banks and credit unions that work with the U.S. Small Business Administration (SBA).

In 2009 under President Barack Obama’s administration, the SBA started a microloan program to help struggling small businesses get loans up to $50,000 (with an average loan amount of $13,000). Designated lenders, like banks and other financial institutions, work with the SBA to offer microloans to businesses that need them. To date, the program has provided tens of thousands of loans to small business owners for the purposes of starting a new business or expanding an existing one.

However, though microloans are designed with small businesses in mind, they have certain restrictions and limitations. We’ll discuss the drawbacks of microloans—as well as the benefits—in the Pros and Cons section.

Why might your business need a microloan?

Getting approved for a traditional bank loan can be tough. Even if your business is booming, you may still be denied a loan. Here are a few reasons why:

  1. Not enough collateral: In order to take a risk on your business, many banks require collateral in the form of assets or property. If you fail to pay back your loan, the bank will use your collateral to recoup their payment. However, if you’re just starting out and haven’t built up enough assets or revenue, you may not have the collateral necessary to get approved for a loan.

  2. Not enough cash flow: If your business doesn’t have enough revenue or cash flow to make your loan payments every month, banks will likely deny your loan application.

  3. Credit history or credit score: To qualify for a bank loan, you must have a good personal and business credit history and score. Your credit history doesn’t just determine whether or not the bank will give you a loan—it also determines the interest rate you qualify for. If you just started your business, have missed vendor or loan payments in the past, or don’t have considerable cash flow, you may not have a strong enough personal or business credit profile to meet a bank’s requirements.

  4. Small loan amounts: Most small businesses aren’t looking for massive loans—they’re looking for small amounts of capital to tide them over for a short period of time. However, traditional banks are designed to serve bigger businesses that need significant capital injections, like a hundred thousand dollars to a million dollars. For that reason, many banks will deny your application for a smaller loan in favor of prioritizing customers who need larger amounts of money. Because the cost of underwriting is the same whether the loan is $5,000 or $500,000, small loans simply aren’t as profitable for banks as larger loans.

  5. The risk is greater for banks: Banks are extremely risk averse, especially since the recession in 2008. Banks are especially cautious when dealing with small businesses that may not grow or be able to make payments on time. To avoid losing money, traditional banks are more inclined to deny your small business a loan in economically unstable climates.

When a traditional bank refuses your loan application for a small business loan, a microloan can be a great option. Unlike business loans from traditional financial institutions, there are few limitations for who can apply for microloans. Microloans are available to most small business owners, even those with low credit ratings or cash flow problems.

How can you use a microloan for your business?

There are a wide range of possibilities for how to use a microloan. You can use a microloan to fulfill basic operational requirements when setting up your new business or when growing your existing operation. Microloans offered by the SBA lending program are often used for the following:

  • Working capital

  • Inventory

  • Supplies

  • Furniture or fixtures

  • Machinery or equipment

  • Start-up costs

How can you qualify for a microloan?

MFIs and small business lenders offer microloans to qualified small businesses. Businesses looking for a microloan might be relatively young, have cash flow issues, or be located in a low-income area. Depending on your business’s finances and credit score, it may be easier to get a microloan from a lender than a term loan from a major bank. Traditional term loans can be hard to qualify for without a stellar credit score, whereas the requirements for a microloan are more flexible. Keep in mind, however, that qualifications for microloans may vary depending on the lender’s requirements.

Here are the factors lenders consider when evaluating a microloan application:

  • How long your business has been in operation

  • The amount of money you need

  • Your business’s location

  • Your financial track record

  • Your long-term goals

The likelihood that you’ll be able to repay the loan within the given time frame

If you’re just starting your business, microloan lenders will generally require you to provide a comprehensive business plan. This plan should indicate:

  • How you plan to generate revenue

  • How well you understand your market

  • What you’ll use the microloan for

  • How the microloan will help grow your business

Getting approved for a microloan has much more to do with your vision and story than with your creditworthiness. Microloan lenders analyze your business goals, background, and plans in order to assess your reliability as a business owner and determine how much potential your business has.

Pros of getting a microloan

  1. They cater to small businesses: A microloan is a good option for a small business, especially if you don’t need a large amount of money and have never borrowed from a bank before.

  2. They’re easier to obtain: There are fewer requirements to qualify for a microloan than for a traditional term loan. Even if you don’t have a strong personal credit score or any credit history, you may still be eligible for a microloan.

  3. They may come with additional help: If you get approved for a microloan, your lender may also offer you technical support, guidance through the loan process, and advice about how to make your business more successful.

  4. The interest rate is lower than a credit card: The interest rate for a microloan is typically less than that of a credit card.

Cons of getting a microloan

  1. There are limited funds: Since many lenders depend on government guarantees, donations, endowments, or contributions to offer microloans, the amount of money you can borrow may be limited. For example, the average amount for a microloan from the SBA is $13,000, which may not cover all your expenses.

  2. Less accessibility: If there is no non-profit MFI in your area, it can be hard to get a microloan.

  3. Higher annual interest rates than a traditional loan: The annual interest rates for a microloan are typically higher than the annual interest rates for a traditional loan or SBA 7(a) loan.

  4. They may require collateral: The requirements for microloans vary from lender to lender. Depending on which lender you choose, you may have to provide collateral or a personal guarantee.

What’s the best way to find a certified micro lender?

You can visit the AEO website to find micro lenders listed by state. The SBA also has a similar state-based resource. Each lender has their own criteria and procedures, so it’s crucial to do your research. Taking the time to understand your lender’s unique requirements means there’s less chance that you’ll submit a loan application that’s incomplete or doesn’t have the right paperwork.

How can you apply for a microloan?

To apply for a microloan, follow these basic steps:

  1. Find a certified and reputable lender, preferably in your area.

  2. Ensure all your paperwork is complete.

  3. Draw up a comprehensive business plan. If you haven’t done this before or would like some help, the SBA offers guidance here.

  4. Show evidence of your business cash flow and financial statements.

  5. Define how you plan to use the loan if you get approved.

  6. Collect and include sound credit references.

  7. Identify the assets you'd be willing to use as collateral, if required by the lender.

  8. Support your claim that you can pay the lender monthly loan installments.

  9. Calculate the amount of funding you need and be sure that you’re applying for an appropriate loan amount.

Where can you get an SBA microloan?

Microloan lenders work with the SBA to give small business loans that aren’t just flexible, but also have lower interests than traditional bank programs.

You can use your SBA microloan for working capital, equipment or machinery, furniture or fixtures, inventory, and supplies. You can’t use the funds to pay off debt or purchase real estate.

The specific repayment terms for your microloan are based on the amount of money you need, the planned use for your money, the lender’s requirements, and your business’s needs. However, the maximum amount of time you have to repay an SBA microloan is six years. Interest rates vary depending on the particular lender, but they’re generally between 8-13%.

There are a number of lending institutions and non-profit community-centered organizations across the US that can help you secure a microloan. To find an authorized micro lender in your area, search for your local SBA district office here.

How to know if your business qualifies for an SBA microloan

If your business needs less than $50,000 in funds and you have decent business credit and a great business plan, an SBA microloan could be right for you. Microloan lenders who go through the SBA tend to focus on newer businesses or business owners who fall into certain minority groups. Microloan lenders don’t base their decision solely off of creditworthiness, but they do look for borrowers to have a certain minimum credit score. While not publicly posted on the SBA’s site, it appears the SBA microloan program requires a minimum credit score of 575. Above all, lenders want to know 1) that you can repay the loan and 2) that your business has the potential to grow.

To apply, you should have the following:

  • A decent credit score

  • Collateral

  • Proof that your business is generating considerable revenue OR financial projections that look promising

  • Proof of steady cash flow

  • No criminal background

  • A comprehensive business plan that explains your business’s value proposition, growth potential, and target market

  • An explanation of how much money you need, what you plan to use it for, and how it will help grow your operation

Other SBA loans for small businesses

The SBA has a handful of loan programs that cater to small business owners. If a microloan isn’t right for you, consider one of the below options instead:

SBA 7(a) loan

7(a) loans, the SBA’s most common financing option, are designed for small business owners who meet certain requirements. If you’re approved for a 7(a) loan, you can use the funds to:

  • Cover short and long-term working capital

  • Refinance business debt

  • Purchase furniture, fixtures, equipment, and supplies

  • Purchase real estate

  • Expand your current operation

  • Launch a new business

  • Start a construction or renovation project

With 7(a) loans, the SBA can guarantee up to 85% of a loan up to $150,000 or 75% of a loan greater than $150,000. The average APR for a 7(a) loan is between 5% and 11%.

To qualify for a 7(a) loan, you need to be a for-profit small business operating in the US. You also need to be able to demonstrate a need for the loan and use the funds for a reasonable business purpose. You can apply for a 7(a) loan here.

SBA 504 loan program

The 504 loan program is designed for businesses that need long-term, fixed rate financing for major fixed assets. 504 loans are issued through Certified Development Companies (CDCs), which partner with the SBA to foster economic development in their communities.

You cannot use a 504 loan to cover working capital or inventory, to refinance debt, or to invest in rental real estate. However, you can use a 504 loan for the following purposes:

  • Buying or constructing buildings or new facilities

  • Buying land

  • Purchasing long-term machinery or equipment

  • Improving existing facilities

  • Improving land, streets, utilities, parking lots, or landscaping

Whatever you use the funds for should ultimately help create jobs and promote community business growth. The repayment terms for 504 loans can be up to 20 years with interest rates that hover around 3% of the total debt.

To qualify for a 504 loan, your business should fit the SBA’s size standards, be a for-profit company operating in the US or its territories, and have an average net income of less than $5 million. You can apply for a 504 loan by finding a CDC in your area.

Grow your business with a microloan

As one of the more accessible financial products available, microloans have become extremely popular over the last several years. Since traditional banks aren’t always willing to take a risk with small businesses, many small businesses are turning to microloans as an alternative source of funds. A microloan may be easier to obtain than a conventional term loan from a bank, especially if your business is looking for a loan amount less than $50,000.

However, if you need access to credit or ongoing funds, you may want to consider applying for financing through Fundbox. We offer small businesses fast access to credit and a large amount of flexibility, both of which are critical when growing your business.

How Fundbox can help solve your cash flow problems

All businesses have different needs, but they all need cash flow to thrive. Some are on the cusp of growth but need funds to fuel their ambitions. Others might be waiting on a customer to pay and need cash to cover expenses in the meantime.

Regardless of your cash flow needs, Fundbox can help. Fundbox is a technology company committed to helping small businesses solve their cash flow issues and grow by providing them access to credit. Founded in 2013 by a team of entrepreneurs with the goal of solving small business cash flow issues in a more intuitive way, Fundbox is trusted by over 130,000 small businesses across the US. Fundbox has received awards from industry experts such as Accountex, PYMTS, Forbes, and Goldman Sachs.

If you run a small business that’s ready to grow but need capital to get there, Fundbox can help. Say, for example, that you manufacture kid’s clothing and need to stock up on inventory before your busy season. If you’re approved by Fundbox, you can draw against your Fundbox Credit any time and buy the inventory you need when you need it. Pay back the drawn funds over 12 or 24 weeks—just as you’re making sales. Likewise, if you run a web design company and need a contractor to help take on new client work, you can use Fundbox to make payroll while you wait for your client to pay you.

Fundbox can also solve your cash flow needs if you’re waiting on unpaid invoices.

We provide on-demand capital to tide you over till your cash begins to flow again. If you run a landscaping business and a large customer is slow to pay, you may be scrambling to pay your crew while you wait for the customer. Fundbox is ideal for this scenario. If you’re approved, you can draw on your Fundbox line of credit any time, and only pay when you draw funds.

  1. Get started quickly: To sign up, simply enter an email address and phone number, then create a password. Next, choose to connect your business bank account and accounting software or just your business bank account to give us insight into your business. We built Fundbox from the ground up with small businesses in mind. We can give you a credit decision in under three minutes. Fundbox looks at your business data—including outstanding invoices, transactions, and customers—to determine whether or not you’re a good fit for Fundbox Credit.

  2. Speedy delivery: When you draw funds, they transfer to your account as soon as the next business day.

  3. Easy repayments: If you’re approved, you can draw up to your credit limit, which can be as high as $100,000. Choose 12 or 24 weeks repayment terms. Fundbox charges a simple weekly fee. Fees start at 4.66% of the drawn amount. Fundbox automatically debits your bank account so you never have to remember to make a repayment (though you do need to make sure you have enough money in your account each Wednesday when your account is debited). The best thing is that you can repay early and Fundbox will waive the remaining fees. Since Fundbox’s fees are flat, this means you can save a lot. With Fundbox, there are no subscription, setup, or inactivity fees. You only pay when you draw, and you always know the amount you owe before committing to anything.

How to apply for Fundbox credit

It’s simple to register with Fundbox. The process takes less than a minute and there are no forms to fill out.

  1. Sign up in seconds. Enter your email and phone number, then create a password to register.

  2. Get a decision in minutes. Choose to connect your bank account and approved accounting software—or just your bank account by itself—to give us insight into your business.

  3. Funds available right away. If you’re approved, you can draw funds anytime. Funds transfer as soon as the next business day.

You can visit your dashboard to draw funds, check your available credit, see your outstanding drawn amounts, and preview upcoming payments. All repayments are automated and you only have to pay while you use the funds.

Requirements

With Fundbox, the application process is swift and you’ll hear back from us in a few hours. To qualify for Fundbox you should have:

  • At least six months of business transactions

  • Business checking account

  • Ideally $100,000 in revenue

  • A FICO score of 600 or better

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