Microfunding is a type of funding offered to self-employed individuals and small business owners by individuals instead of banks or other lending institutions. Also known as microlending, these programs issue smaller amounts of money, but they also provide mentoring and training along with the loan. The money for the loan may come from one person or may be collected from several people who will each contribute to the total amount.
Microfinancing operations facilitate peer-to-peer lending and serve borrowers who may have barriers to traditional funding. The goal is to help individuals to create a better future for themselves in the hopes of building a stronger community. That’s why in most operations the funds are borrowed from and invested back into the community.
If you are looking to expand your business or take it to the next level and you only need a small amount, microfunding might be a great option for you. In this guide, we will explore how microlending works and direct you to several programs you may be able to access.
How does microfunding work?
Alternative funding either through crowdfunding or microfinance is great for small business owners and individuals looking to start their own ventures who may not have access to traditional loans and investments. Microlending has been very successful in helping individuals launch their small businesses in developing countries. If the results from the Grameen America Program continue, microcredits are proving to be an excellent option for entrepreneurs just starting out in the U.S.
The loans are not typically backed by any sort of collateral, and borrowers will encounter different requirements and loan terms from lenders. If you’re looking to apply to a program, these are the general assessment criteria:
- A background check, including a credit rating evaluation
- Proof of business income
- Other sources of income
- Business plan
- Length of time you’ve been in business
- Repayment history if you’ve participated in microlending in the past
The programs are designed and cater to business owners and individuals such as startups with only a few employees, minorities, women, veterans, young entrepreneurs, and freelancers who may not be eligible for traditional funding options. Some of the programs also offer mentorship to strengthen the financial literacy and business knowledge of members. Some also organize events to facilitate networking among members and the community, which is very important for small businesses.
How do I obtain microfunding?
Microloans are extended to small business owners or individuals who are not eligible to borrow from banks or credit unions and who are looking to secure small loans that are below the amounts required by a bank. As a business owner looking to get funded, you have to remember that your lenders are individuals; you have to make them either believe in your business idea or trust you as a person.
Below we’ll go into a few things to consider before applying for a microloan.
Create a business plan
As with any funding request, you must create a business plan detailing what your business idea is, where you operate, what you sell or what services you offer, and who your customers are. If you’re already established, you may describe your business model and include what you’ve accomplished with your business so far. You may also include a personal story and a short biography to create a connection with your lenders.
The business plan you submit should also include why you need the funding. If possible, provide a breakdown of each cost you are hoping to get covered. For instance, do you need additional funding for operating expenses or to buy more inventory?
And lastly, make sure you include how you plan to pay off your loan. Depending on the amount you need, your loan may come from a single person or several people — and they would need reassurance that their money will return.
Explore microfunding programs and options
Here are two microfunding programs to look into if you’re considering this route:
- The SBA Microloan Program — The SBA Microloan Program offers loans of up to $50,000 to local businesses through community-based nonprofit groups, such as:
- CDC Small Business Finance Corp. — Offers startup funding for new businesses and loans to established businesses looking to expand in California, Arizona, and Nevada. They also facilitate loans between $20,000 and $250,000 through the SBA Community Advantage Program.
- Pursuit Lending — Formerly known as the New York Business Development Corporation, this group is a major SBA lender with a focus on serving businesses and lending partners in New Jersey, New York, and Pennsylvania. It offers online loans of up to $100,000 for approved borrowers and funding of up to $500,000 through its ImpactLoan program. They also provide SBA 7(a) and Community Advantage loans through their affiliates.
- Main Street Launch — Serves business owners in the San Francisco Bay Area with education, networking opportunities, and business loans of $10,000 to $250,000.
- LiftFund — Offers SBA Community Advantage loans of $50,000 to $250,000 to businesses in low- to moderate-income communities in 13 southern states in the U.S. LiftFund is among the top U.S. microlenders.
- Accompany Capital — provides financing of between $500 and $50,000 to small retail, manufacturing, restaurant, and service businesses in New York City. As a Community Advantage lender, they offer SBA-guaranteed small business loans ranging from $75,000 to $250,000. These loans are available to any qualifying small business in Queens and Staten Island, and to qualifying immigrant, refugee, or women-owned businesses in Brooklyn, Manhattan, and the Bronx.
- Grameen America — The Grameen America Program was founded in Queens, New York, in 2008 on the legacy and model by Nobel Peace Prize Laureate Muhammad Yunus. It mostly serves women who live below the poverty line and who don’t have access to mainstream financial services. The program requires participants to form a network of five people and undergo group financial training — including instruction in loan repayment, saving, credit establishment, and asset accumulation — before getting an individual a low-interest microloan of between $500 and $2,000 to start or expand a small business.
- Kiva U.S. — The program offers small businesses 0% interest microloans of up to $10,000. Kiva is a nonprofit organization operating in more than 80 countries. To receive an interest-free microloan through Kiva, U.S. borrowers must convince friends and family members to lend to them first to establish the borrower’s creditworthiness. Once that happens, Kiva opens the loan to its lenders for funding.
Whether you need to show it to lenders or not, you should have a financial plan for your business before deciding to start your venture. It doesn’t have to be extremely specific and detailed, but you should have a clear projection of the amount of capital you need, how much your monthly or weekly operating expenses would be, and how much you expect to earn.
If you have an established business, gather this information and create an outline showing your income and cash flow for the length of time your business has been operational. This exercise will not only help you secure funding, but it will also provide insight into whether your business has earning or growth potential.
As a small business owner, word-of-mouth marketing is your best chance of acquiring clients — and networking with your fellow business owners and community members is the first step in building those connections. Join microlending programs and organizations that cater to small businesses. These programs will not only allow you the opportunity to interact with your lenders, but they will also offer support and services to help you grow your business.
Microfund your business for major rewards
Microfunding is yet another financial innovation powered by the growing digital world and people’s innate nature to connect with one another. Reach out to your community, network through various microlending programs, and start or expand your business. These programs offer resources and wonderful opportunities to build better and stronger communities that you won’t want to miss.
At ZenBusiness, we have a deep understanding of the startup process for small businesses. We also know this stage can be overwhelming for new business owners. That’s why we offer services for every step, from filing your business formation paperwork to securing a business bank account. Let our dedicated team at ZenBusiness handle the legal details of your business formation so you can focus on networking and growing your business.