Small Business Microloans: Get Money When the Bank Says No

Need a loan for a small business? When the bank says no, a microloan may be the answer for the funding a business owner needs. This guide to microlending includes a number of sources for microloans.

When someone hears the term “microloan,” they might think of something having to do with size. A microloan must be really small, right? In some cases, yes, but that isn’t necessarily true. Thankfully, this guide walks through the need-to-know facts about microloans, a promising type of small business loan.

What is microlending?

Microloans are small loans often used by businesses that don’t have good enough credit to get a traditional bank loan. Muhammad Yunus, a Bangladeshi economist and winner of the 2006 Nobel Peace Prize for his work, is considered the first person to put microlending into practice as it’s known today; he lent money to women and men who couldn’t get loans from banks.

He started Grameen Bank, which lent largely to Bangladeshi women to buy cows, seeds, retail goods, and just about anything else they needed to start a business. Today, that idea has grown to massive proportions. Sites like Kiva still largely follow Yunus’s original idea, but microloans are now available to entrepreneurs of just about any size. 

Sources of Microloans for Working Capital

Because microlending has proved successful, there are now numerous sources of funding for small businesses. A quick search of the internet shows many microloan lender options, but here are some common ones.

Small Business Administration (SBA) Microloan Program

The United States Small Business Administration (SBA) has a microloan program that provides loans of up to $50,000 to small businesses for startup and expansion. The average loan size is $13,000. The funds are provided through local, community-based intermediary lenders, and businesses and startups that wish to apply for microloans need to do so through their local intermediary organization. Names of those intermediaries can be obtained from a local SBA District Office. Since the SBA backs the loan, it’s possible for borrowers to get better interest rates or more favorable terms than they might be able to get alone.

Want to learn more? Check out the Small Business Administration definition guide.

OnDeck

OnDeck Capital provides short-term working capital loans for small businesses. The loans are true term loans, not merchant account advances or any other type of cash advance. OnDeck uses different criteria to determine eligibility for a loan than most banks do, making it possible for some small businesses to qualify when they wouldn’t through more traditional sources because of their credit history. Business owners can apply for their loans online or over the phone and get funded in as little as one business day. OnDeck requires businesses to be open at least one year with revenues of at least $100,000 to apply.

Prosper

Prosper is a peer-to-peer lending platform that offers loans between $2,000 and $5,000 in as little as one business day. Prosper doesn’t currently have an explicit credit score requirement for their platform, but their website does warn that someone with a credit score under 600 might not qualify.

Prosper borrowers can choose the loan type and repayment terms that work best for their needs. Payments (and interest rates) never go up after the loan terms are set, and Prosper doesn’t charge prepayment fees.

Upstart

Upstart provides personal microloans that some business owners can use for certain business expenses. Upstart offers loans ranging from $1,000 to $75,000, with fixed rates ranging from 6.2% to 35.99% (at the time of this writing). Upstart doesn’t charge prepayment fees, either, which can be a big plus for borrowers who want to get out from under debt quickly.

Crowdfunding Sites

Crowdfunding and microloan programs are similar in their mission: they’re funding opportunities for those who don’t qualify or don’t want to get a bank loan. But they’re different in how they help borrowers reach that goal. A microloan is a monetary loan that has to be paid back in cash. It may come from multiple sources, but at its core, it’s a loan where interest has to be paid.

Although the differences are becoming increasingly blurred, crowdfunding is usually a type of grant where the person doesn’t repay the funds because a bunch of individuals “donate” to the project. As a result, the business owner doesn’t need to give a personal guarantee or other collateral for crowdfunding.

Often, though, crowdfunding sites are best for projects that the general public can get excited about, usually producing something tangible that they can buy and enjoy after the project is completed. As a result, crowdfunding might not be a great way to fund purchases like new equipment (unless that equipment helps directly make the products that backers will receive).

The main drawback of this financing type? Usually, borrowers don’t get quick access to funds; they have to wait for platform users to contribute.

Kickstarter

Kickstarter isn’t going to fund a business specifically, but if a person has a creative project, Kickstarter’s the place to go to raise money from potential individual donors. A project has to be 100% funded by a certain date in order to receive funding, and the creator retains complete ownership of the work.

In return, the creator will often offer a product or service in return for the funding. If a band is asking for money to produce an album, the donors might get an autographed CD or vinyl, for example. Or if a hobbyist creates their own board game, they might offer their donors Kickstarter-exclusive card decks, game pieces, or special editions for the game itself.

Indiegogo

Indiegogo is similar to Kickstarter; it’s still a crowdfunding option. But Indiegogo gives borrowers an option to receive funds even if the announced funding goal isn’t reached. Some of their highest pledging projects include Cyberpunk 2077: the Board Game, which got over $11 million in funding. Of course, that’s an outlier; Cyberpunk has a big following to begin with. But plenty of entrepreneurs receive small amounts of funding that give them the edge they need to get started.

Crowdfunder

Crowdfunder participates in a new kind of crowdfunding called equity crowdfunding. Equity crowdfunding blurs the lines between microloans and crowdfunding, but there are still differences.

Equity crowdfunding allows any number of investors to fund specific business needs. As laws change, this model is evolving into both debt-based financing (like a microloan) or equity-based, where the investors take a stake in the company. Crowdfunder calls this “crowdfunding 2.0.”

Crowdfunder got its start in the UK, but they have expanded to support U.S. businesses.

Qualifying for a Microloan: Eligibility Requirements and More

Microloans may use technology to add a modern twist, but all loans have the same basic rules. A borrower has to demonstrate a track record of responsible financial behavior in their business and professional life.

That means that if a business owner has other existing loans, they should pay them on time. They might also take some steps to elevate their personal credit score and provide plenty of evidence that their business is growing. They’ll also take time to explore the various options to find the one that best fits their needs.

RELATED: Need a bigger loan? Read about SBA 7a loans.

Once a business owner has the funding they need, they can still take further steps toward business profits by making sure customers are paying them on time. The ZenBusiness Money Pro app makes it fast and simple for small business owners to get paid. They can use the platform to easily send custom invoices, accept credit card and bank transfer payments, and manage their clients from an easy-to-use dashboard.