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.
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:
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.
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.
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.
Here are two microfunding programs to look into if you’re considering this route:
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.
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.