How to Get Microloans for Small Business Startup

Not every business needs a large loan to get off the ground. In fact, research tells us that entrepreneurs who start lean without borrowing a lot of money are more likely to succeed. And while there has been a lot written about microloans for small business startups, there isn’t a lot of information available on the topic.

So for today’s post, I decided to provide you with all the knowledge and resources you need to get a microloan for your small business. Ready? Let’s learn about this important topic.

But First, What is a Microloan?

Since the recession of 2008, traditional banks haven’t been very helpful to entrepreneurs looking to start a business or expand an existing one. As a result, two things happened. First, in 2009, Obama granted $54 million to the Small Business Association (SBA) to give small business owners access to the funds they needed. But while this helped many people, those whose credit histories were marred as a result of the downturn of the economy weren’t able to qualify for the microloans through the SBA. The SBA operates like traditional banks and uses credit reports as the biggest factor when determining whether or not to grant a loan.

The second—and most significant—thing to come out of it was the advent of nontraditional lenders. These lenders, aided by the internet, popped up and began providing small business owners with the startup loans they needed. And they are experts in microloans.

A microloan is typically a $5,000 to $100,000 loan, and while micro-lenders check credit histories, they don’t solely rely on them to make lending decisions. They also listen to the “story” of the business, look at detailed business plans, and talk to the entrepreneur to hear about their ideas and plans. Then, taking all of that information into consideration, they make a decision. This has allowed many people to start a business with bad credit.

What Can You Use a Microloan For?

Microloans can be used to start a business or expand an existing one, and most of the related expenses are allowable, with a few exceptions. Micro-lenders don’t allow borrowers to purchase real estate, pay off debts, or purchase personal items with the loans. Instead, the money is for starting a business or growing one that’s already in existence.

Now that you have a better understanding of what they are, let’s talk about where to find microloans. We’ll start with SBA microloans for startups.

Where Do I Find Microloans?

Getting an SBA Microloan

SBA microloan

As I mentioned above, the SBA offers microloans for small business owners, but the approval requirements are much tougher than in some other places. Here are a few facts about getting a microloan from the SBA.

· In order to quality for an SBA microloan, your credit score has to be 720 or higher.

· You will need to offer some collateral to secure the loan.

· You need to have some business experience to qualify for the loan.

· SBA microloans have a cap of $50,000

· The APR for an SBA microloan starts at 6.5 percent and goes up from there. It is based on your credit history.

· The application process is lengthy. It can take 3 weeks to a few months to apply for the loan and for it to be funded.

· Repayment terms range from 5 to 25 years.

· Here’s a list of the current SBA microloan lenders.

Sounds a lot like a traditional bank loan, doesn’t it?

Luckily, nontraditional lenders have stepped up to fill in the gap and offer some quality products to entrepreneurs who can’t qualify for a bank or SBA microloan.

Getting a Microloan from an Alternative Lender

Get a microloan from an alternative lender

Now on to the good news. Alternative lenders are the leading provider of microloans—and with good reason. Like I said earlier, a micro-lender in this space will look past your credit history and take into account your ideas, business plan, and the possibilities of your business. Honestly, entrepreneurs couldn’t ask for anything more when it comes to getting a loan for a startup. After all, in order to become a success, an entrepreneur needs people to believe in their ideas and plans.

Alternative lenders such as Kabbage take the time to get to know potential borrowers and offer startup advice, marketing suggestions, and even financial help along the way. In other words, it’s like having an experienced partner—without having to split the profits with them.

And the approval process is much simpler. Remember the 3 week minimum time for an SBA microloan? At Kabbage, the approval process can take just ten minutes.

Keep in mind that when you use an alternative lender for a microloan, you’ll likely pay a higher interest rate. That’s because they take chances on borrowers that traditional lenders won’t, and unfortunately, there is a cost to that.

In addition to being able to get microloans from the SBA and alternative lenders, here are a few other options to consider:

· The Woman’s Initiative for Self-Employment (WISE): This organization helps immigrant and refugee women by offering them microloans.

· Accion. This organization also offers microloans to small businesses, but will consider lending to home-based business owners as well.

Of course, there are other ways to get the money you need for your startup. You can utilize lines of credit, vendor credits, merchant cash advances, and business credit cards. The people at Money put together a comprehensive article that explains each one of these options in detail—and links to the best places to find those types of loans.

Getting financing for your small business dream is much easier than it was just ten years ago. If you don’t qualify for a bank loan, think about applying for a microloan instead. Your chances are not only better for getting one, but borrowing a smaller amount of money for a startup is one of the smartest things you can do.