Micro Loans Guide
Having Cash Flow Problems? Get a Micro Loan and Get Back on Your Feet
[Updated April 14, 2020]
For small businesses impacted by COVID-19, these resources can help.
Having Cash Flow Problems? Consider a Micro loan for your small business
Whether you’re considering investing in marketing and expanding your small business, or you’re facing an urgent cash flow gap and worried about making payroll this month, there are many reasons for business owners to consider micro loans among the many available funding options. Most owners are familiar with traditional bank loans, but those are difficult for many to obtain. If you aren’t able to qualify, or don’t have time to wait, for a traditional loan, you may opt for a micro loan to get the funds you need.
In this guide, we’ll discuss the basics of how micro loans work, why businesses may want to use micro loans, how you can qualify for a micro loan, the pros and cons of using micro loans, and other alternative sources you may wish to consider for funding your small business.
What is a Micro loan?
A micro loan, as the name suggests, is a small term loan between $5,000 and $50,000 and can be used by a small business in its early stages to pay for inventory, machines, office and business supplies and equipment, working capital. A micro loan can help your business when you don’t have a credit record or otherwise don’t qualify for a loan from a bank. Micro loans are generally low-interest short-term loans and are usually provided by small-business-friendly lending organizations such as banks or credit unions that work with the U.S. Small Business Administration (SBA).
In 2009, the SBA started a micro loan program under President Barack Obama’s administration. The purpose of this program was to enable small businesses to get loans between $500 and $50,000 (with an average loan amount of $13,000) when they needed it. There are designated lenders (banks and other financial institutions) that work together with SBA to offer these micro loans to those that may need them. To date, this program has provided tens of thousands of loans to different small business owners so they can start a new business or expand an existing one.
Though micro loans are designed with small businesses in mind, they do come with some restrictions and limitations. We’ll discuss the big drawbacks and limitations of micro loans, as well as some benefits, in the “Pros and Cons” section below.
Where Can You Get an SBA Micro loan?
If you are looking for a suitable micro loan, there are a number of lending institutions and non-profit community-centered organizations that will help you secure a micro loan all over the U.S., so it’s best to look around carefully and select the right one for your small business needs. Micro loan lenders work together with the SBA to confer loans to small business owners that are not only flexible but also have lower interests than banks.
While the SBA does not give the loans to the business themselves, it establishes certain safeguards to protect lenders and their interests. For example, if a loan recipient does not pay back the entire amount of a loan, the SBA will partially repay the lender. Because of this protection, lenders are willing to provide small business owners longer and better loan payback terms.
How Could You Use a Micro loan for Your Business?
The possibilities for how to use a micro loan are huge. Business owners face few restrictions on how and where to use the funds from a micro loan, which is part of what makes this funding option popular.
In addition to using a micro loan to fulfill basic operational requirements when setting up a business or growing an existing business, a micro loan is also designed to help out borrowers & communities that are underdeveloped or in their early startup stages. This type of loan has helped many entrepreneurs to establish successful businesses and has also helped the economy grow in underdeveloped areas.
Micro loans offered by the SBA lending program are often used for:
Buying inventories or supplies
Buying furniture or fixtures
Buying machinery or equipment
What is the difference between a Microcredit and a Micro loan?
While microcredit and micro loans sound alike, they’re quite different. Microcredit is a small personal loan given to low earners who typically lack sufficient collateral for other funding options. Microcredit is often seen as a way to encourage impoverished populations to gain self-employment and includes non-credit activities such as micro savings, and vocational and business training programs.
In contrast, a micro loan is a small loan that is given to small businesses and includes credit as well as non-credit activities. As a small business owner, you should consider micro loans as opposed to microcredit.
Why Your Business May Need a Micro loan
Many small business owners have experienced being turned down by banks when applying for a traditional loan. Even if business is booming, you may still be denied a loan. There are a number of reasons for this, including:
Not enough collateral: More often than not, banks require collateral, in the form of assets or property, as a guarantee. If you fail to pay back your loan, the bank will take its payment in the form of your collateral. However, most small businesses lack this kind of collateral, especially if they are just starting out, so the bank usually turns down their loan applications.
Not enough cash flow: If you don’t have a healthy business with enough revenue to reliably make monthly loan payments, a bank is likely to deny your loan application.
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 will determine whether the bank will give you a loan and at what interest rates. You may not have built a favorable business credit history either because you’ve just started your business, have missed payments to vendors or other lenders in the past, or don’t have strong cash flow. In any case, the bank has a right to deny you a loan if your business or personal credit histories do not meet their requirements.
Small loan amounts: Usually, a small business does not require a big loan, and is instead seeking a small amount of cash to tide them over for a short time. However, traditional banks are not designed to serve this need. When applying for a small loan from a bank, your chance of being rejected or waitlisted is high. The minimum amount many banks can lend profitably is around $100,000. This is more than many young businesses need. A small loan is not as profitable for a bank because whether the loan is for $5,000, $50,000 or $500,000, as it will cost the bank the same amount in manual underwriting costs.
The risk is greater for banks: Banks are extremely risk-averse, and have been even more so following the Great Recession (2007-2009). Banks are especially careful when dealing with small businesses that may or may not grow, or may or may not be able to make payments on time. To avoid the risk of losing money, traditional banks are more inclined to refuse your business a loan in economically unstable climates
If a bank refuses your loan application, a micro loan is one of the best next options for a small business owner. There are few limitations as to who can apply for a micro loan. It’s available for anyone who needs it for their small business needs, even those with low credit ratings or cash flow problems.
How does a micro loan work?
A micro loan is often used by early-stage startup businesses or other small businesses that may need more working capital to fulfill operational expenses due to short term cash flow problems. Here is how micro loans work in a nutshell:
Find a micro loan provider approved by the SBA
Do some research to ensure their business nature and background to make sure they’re a good fit for you.
Apply & see if you qualify for a loan
How Can You Qualify for a Micro loan?
A micro loan is specifically offered by micro finance institutions and lenders to small businesses that are relatively young or are having cash flow issues. It is easier to get a micro loan than a term loan from a major bank where there are many restrictions, higher interest rates, and more stringent regulations. The requirements for a micro loan are flexible, but qualifications for micro loans may vary depending on the lender’s requirements.
Factors lenders consider before providing a micro loan include:
How long your business has been in operation
The amount requested
The location of the business
Your financial track record
Their estimated likelihood that you will be able to repay the loan within the given time frame
If you are just starting your business, the lender will require you to provide a comprehensive business plan. This plan should indicate:
How you plan to generate revenue
What you plan to do to succeed
How well you understand your market
Micro loan lenders analyze you and your business goals before processing your loan application. By doing so, they attempt to determine your reliability and whether to approve your loan application or not. In other words, your approval is based on much more than just your credit history.
Pros of Micro Loans
A micro loan 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.
The requirements for a micro loan provided by a lender are more flexible than those of a proper bank. There is more flexibility on the borrower’s credit score and personal history, for example.
If your business is in need of a small amount (usually $5,000-$50,000), a micro loan could be a good option.
If you get approved for a micro loan, your lender may also offer you technical support, guidance through the loan process, and advice about how to make your business more successful.
Even if you don’t have a strong personal credit score or any credit history, you may still be eligible for a micro loan.
The interest rate of a micro loan is less than that of a credit card.
Cons of Micro Loans
The annual interest rates for a micro loan are usually higher when compared to the annual interest rates for a traditional loan or an SBA loan.
Since many lenders depend on government guarantees, donations, endowments or contributions, the amount of money you can borrow as a micro loan may be limited.
It may be hard to get a micro loan if there is no non-profit micro finance institution in your area.
Since the average amount for a micro loan is around $13,000, it may not be enough to cover your expenses and you may need to get another loan from somewhere else.
Qualifying for a micro loan varies from lender to lender and their requirements may vary. There is a possibility that the lender will require a personal guarantee or collateral before lending you the money.
How Can You Apply for a Micro loan?
To apply for a micro loan, follow these basic steps:
Find a certified and reputable lender, preferably in your own area.
Ensure all your paperwork is complete.
Draw up a comprehensive business plan. If you haven’t done this before, or would just like some help, the SBA offers guidance here.
Show evidence of your business cash flow and financial statements.
Define how you plan to use the loan, if you get approved.
Collect and include sound credit references.
Identify the assets you'd be willing to use as collateral, if required by the lender.
Support your claim that you can pay the lender monthly loan installments.
Calculate the amount of funding you need and be sure that you’re applying for an appropriate loan amount.
What is the Best Way to Find a Certified Micro lender?
If you search the internet, you can find listings of certified micro lenders and locate one that’s near you. You can also visit the AEO website where you will find micro lenders listed by state. It’s important to do your research because each lender has their own criteria and procedures. With proper research, you can find a lender that suits your requirements and there is less chance that you will submit a loan application that is incomplete and doesn’t have the right paperwork.
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 funds to pay 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 & 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 70,000 small business across the U.S. Fundbox has received awards from industry experts such as Accountex, PYMTS, Forbes, and Goldman Sachs.
If you run a small business that is ready to grow but need capital to get there, Fundbox can help. Say you’re a manufacturer of kid’s clothing and you need to stock up on inventory before your busiest season. If you’re approved for 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 to hire 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 the cash flow needs for businesses waiting on unpaid invoices.
We provide on-demand capital to tide you over till your cash begins to flow again. Say you run a landscaping business and a large customer is slow to pay. You still need to pay your crew while you wait for the customer. Fundbox is ideal for this scenario. If approved, you can draw on your Fundbox line of credit any time, and only pay when you draw funds.
Get started quickly: To sign up, simply enter an email address, your phone number, and create a password. Next, choose to connect your business band account and accounting software or just your business bank account by itself 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 3 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.
Speedy Delivery. When you draw funds, they transfer to your account as soon as the next business day.
Easy Repayments: If 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 your 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 fees, 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 and What Are The Requirements?
It’s simple to register with Fundbox, takes less than a minute, and there are no forms to fill. All you need to do is:
Sign up in Seconds
Enter your email and phone number, then create a password to register.
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.
Funds Right Away
If approved, draw funds anytime. Funds transfer as soon as the next business day.
If approved, you can visit your dashboard to draw funds, see 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.
With Fundbox, the application process is swift and you’ll hear back from us in a few hours. To be eligible to qualify for Fundbox you should have:
At least 3 months of business transactions
Business checking account
Ideally $50,000 revenue
Today, micro loans have become a popular financial product and are being used by many small businesses that are already on the way to success. Even freelancers are using this loan to support their business growth.
Since traditional and proper banks are not always willing to take a risk with small businesses, many small businesses are turning to micro loans as an alternative source of funds. A micro loan is easier to obtain than a conventional term loan from a bank, especially for those businesses that are looking for a loan amount less than $50,000.
Small businesses should consider alternative online lenders such as Fundbox before applying for a micro loan. Fundbox offers small businesses fast access to credit and a large amount of flexibility--two very important things to consider as you grow your business.