SBA Microloans are a great option for small businesses looking to secure financing for their operation.
You’ve heard it before, every bank you go to gives you the same answer; no.
You’re a small business, you don’t have the collateral, and you’re too much of a risk.
Even with a sound business plan, unless you have a rich Aunt Mildred or a huge cash stash, a small business loan is likely impossible.
How Do SBA Microloans Work?
You need capital for starting or expanding a small business.
Money goes for expenses like equipment, supplies, fleet vehicles, building leases, and sometimes hiring sales personnel.
But if a business gets denied a loan by a conventional bank, what do you do? There are other options open to a small business called microloans.
Microloans are an alternative business loan option for businesses unable to get funding by traditional means.
We are reviewing what we consider the three top microloan options available: OnDeck, Kabbage, and Prosper.
Because of its growing popularity, we’ve also included a short Crowdfunding description at the end of this article.
OnDeck Capital: Best Sba Microloans Source
OnDeck Capital, a small business lender, has their home office in New York City, and branch locations in Arlington, Virginia, and Denver, Colorado.
OnDeck bases their small business financial evaluations on their proprietary technology.
Kabbage uses a similar proprietary lending platform that bases the credit decision on the health of the company and not your personal credit score.
This microloan lending company offers small businesses short-term loans for working capital.
These are actual term loans and not a cash advance. Their proprietary lending rules qualify small businesses for loans they can’t get elsewhere.
OnDeck’s claim to fame comes with their approval in minutes using 2,000 data points per online application.
These points focus on the business health and not the owner’s credit score. Since 2007, OnDeck’s loans topped $1 billion, and the company went public in December after raising $200 million.
Why We Chose OnDeck as the Best SBA Microloans Option
They have relaxed application qualifications with a minimum of 1 year in business and minimum revenues of $100,000.
The company offers two business loan types, fixed-term loans up to $500,000 and lines of credit up to $100,000.
OnDeck serves over 700 business industries with loan advisors knowledgeable in your industry challenges to help choose the financial loan best for your cash flow.
OnDeck reports your payment history to the credit bureaus helping you build a strong business credit profile for earning the lowest financing rates.
What is a Microloan?
Microloans are a business loan that’s so small; most commercial banks don’t even consider lending.
Microlenders fill this need by offering these smaller size loans.
Microlenders are non-profit lending organizations, working on a different funding platform than traditional banks.
The smaller microloans require less funding documentation with more flexible underwriting that banks use.
Their services are ideal for small business owners operating microenterprises with fewer than five employees.
These non-traditional loans are ideal for home-based, street-based, office-based, and storefront businesses like beauty salons and restaurants.
Applicants come from all social statuses but are typically immigrant and low-income borrowers.
With microloan popularity growth, comes an expanded applicant base, including unemployed and college-educated entrepreneurs.
These applicants have a higher credit score, but with the lack of business history or capital, they can’t get approval from commercial lenders.
The United States has several hundred microlenders across the country. Their interest rates are a little higher than a bank, but they help between 250,000 and 300,000 small businesses each year.
Per the Association for Enterprise Opportunity (AEO), these lending companies lent over $2 billion dollars over the past ten years.
This money went to companies otherwise unable to expand or start a business through traditional banking.
Pros and Cons of Microloans
Even though microloans seem like the perfect solution for small businesses unable to secure traditional bank funding, there are pros and cons.
The Advantages of SBA Microloans
- Microloans are smaller loan amounts than traditional banking. These small loans help businesses save money by not borrowing more than they need.
- The microloan structure ranges from several months to a few years and repayment comes in installments. The repayment structure keeps payment amounts equal and includes both principal and interest.
- Microloan companies have lenders acting as counselors. They help small businesses with drafting business plans and developing marketing strategies.
- Microlenders make money available to people with lower credit scores, under 680.
- While lenders require a little credit history, some lenders offer credit builder loans for those borrowers with no history. The credit builders are small, short-term loans that help borrowers establish and build credit.
The Disadvantages of Microloans
Higher Interest Rates
Interest rates are higher than those charged by a traditional bank. Microlenders base the interest rate on the borrower’s personal credit and business experience.
Average rates range between 12 and 18 percent but can top 30 to 50 percent, depending on the loan type and the borrower’s credit score. But, even these higher rates are lower than credit card rates.
Loan Amounts Are Smaller
Loan amounts are small, averaging between $6,000 and $35,000 and not large enough for a business startup funding.
A few microlenders offer a top loan amount of $50,000 or more, but these loan amounts limit the type and size of businesses approved for the loan.
Kabbage: Short Term Loan Provider for Small Businesses
Kabbage offers small loans with short 12-month loan periods.
For those having difficulties meeting OnDeck’s minimum requirements, Kabbage offers help with an annual revenue requirement of $50,000.
But, their maximum loan amount is $100,000. The Kabbage loans give you the flexibility of a line of credit loan.
Your loan is for a maximum amount, like $100,000, which you draw from when needed.
You only get interest charges for the money you draw out. As you pay the loan back, the payments made add to the available balance, like a credit card repayment.
Kabbage advertises interest rates starting at 3.0%. But, when delving into the interest rates, we found that all three companies avoid the APR rate when quoting borrowers.
They place the focus on the repayment dollar amount, called factor rate. Sometimes, factor rates can range between 30% and 50%.
The rate of interest might be higher or lower, depending on credit worthiness, loan amount, and length of repayment.
Prosper: Short Term Social Lending Fund for Small Businesses
Prosper is a simple loan structure called peer-to-peer lending.
Not a bank or typical lending company, Prosper matches individuals looking for a business loan to investors.
They have a database of over 1.66 million members with a loan total of $474,000,000. The first peer-to-peer lending company of its kind, Prosper sets up loans ranging from $2,000 to $25,000 with a 1, 3, or 5-year payout.
The loans offered by the Prosper network are not interest only, but fully amortized loans without a pre-payment penalty for early payoff.
Prosper loans are not traditional small business loans, but a personal loan for small business.
Getting a loan is an easy, three-step process: borrower signs up, investors review and select from submitted loan requests, loans get funded.
Prosper helps people and small businesses save thousands by offering loans at a lower interest rate.
Qualifying for a Prosper loan is easy. You need an Experian score of at least 640, a Social Security number and a bank account.
Qualifying for a Microloan
The basic rules for all microloan companies are the same.
Applicants need a strong record of accomplishment showing responsible and sound financial behavior in your professional life and business.
Borrowers don’t need perfect credit to qualify since lenders consider the full application and not just a credit score. But, you need a credit score of at least 640 or higher and proof your business has continued growth.
Sometimes other strengths in the credit application offset a weak credit score. If your credit report has issues like recent late payments, bankruptcies, or outstanding tax liens, it’s best to wait.
Before applying boost your credit score and pay all loans before the due date, and pay off any small bills you can.
One plus with microlenders, is they consider all factors when weighing credit qualifications. They look at the business history or the business plans for the new business.
They discuss your business and visions for your company, getting to know the applicant’s character before the final decision.
You have a lot of considerations when contemplating a microloan. Before deciding on a microloan lender, explore all your options to find the one most suitable to your financial needs.
Applying for a Microloan
Applying for a microloan is much like a job application. If you handle the application process with professionalism, it raises your chances of securing a loan.
Microlenders not only look at your credit score, but they also evaluate your character.
Show professionalism by completing the entire application and submitting professional and organized income and expense statements and other requested documentation.
A positive cash flow and experience in your field of work shows your ability to repay your loan.
Always give strong references, professional and organized records, and all collateral or co-borrowers for supporting the loan.
Crowd Funding As Alternative to SBA Microloans
If you don’t qualify for funding through any of the three microloan companies.
You have a third option. Like microloans, crowdfunding has services made for people who don’t qualify for a standard bank loan.
Why is The Difference Between SBA Microloans and Crowdfunding?
The difference between the two operations is how each one reaches the funding goal. The microloan is as its name applies.
A money loan with interest rates and a repayment schedule. Even if the money comes from multiple sources, it’s still a repayment loan with interest.
Crowdfunding raises capital through the collection efforts of family, friends, individual investors, and customers.
Funding works by the efforts of collection by large groups of individuals, online, through social media, or other crowdfunding platforms.
This funding source leverages these networks giving better exposure and reach.
Crowdfunding is not a loan, but more like a grant with the person receiving the needed money, but not having to pay it back.
Types of Crowd Funding
Just like the different microloan types, there is a variety of crowdfunding types.
Your growth goals and the service type or product your company offers determines your crowdfunding method.
The three primary crowdfunding types are equity-based crowdfunding, rewards-based crowdfunding, and donation-based crowdfunding.
This crowdfunding type lets contributors become part-owners of the company. Investors trade their capital for equity shares in the company.
The contributor’s investment receives a financial return and a profit share as a distribution or dividend.
Rewards crowdfunding comprises contributors giving money to your business in exchange for a reward. This reward consists of a company service or product.
Even with the reward, it’s still classified as a category of the donation-based crowdfunding due to no equity or financial return. Reward-based is a highly used option on all crowdfunding platforms.
This funding lets the business owner offer contributors an incentive without the expense of offering a stake in the business ownership.
Any crowdfunding campaign not giving a financial return to contributors or investors is a donation-based crowdfunding.
Common crowdfunding campaigns of this type include donations for charities and non-profits, medical bills, and disaster relief.
Why Use Crowdfunding Instead of Microloans?
Crowdfunding websites or platforms are great places for individuals and business owners to raise business capital or funds. They allow them to reach a lot of potential backers in a short time.
But, before using this funding source, consider that even with their large base of loyal backers, there’s fierce fund viewing competition.
Besides understanding their competition, fund seekers must consider the different platforms for choosing a site to help their funding campaign.
Using the correct platform connects businesses and individuals with backers interested in the project needing funds. The right platform also helps them find backers able to offer a strong level of support.
The 10 Best Crowdfunding Websites
- org: Platform for funding campaigns for underfunded public schools. Public school teachers submit vetted projects after meeting deadlines and must-hit goals.
- GoFundMe: Platform allows fund sourcing for professional and personal campaigns. Each donation has funding fees of 5%. The site is free to use and works with social media.
- Kickstarter: Creative projects platform for professional and personal projects based on an all-or-nothing funding policy. Pledges get charged when the funding reaches the project’s pre-set goal.
- Indiegogo: Entrepreneurs, humanitarians, musicians, and artists fundraising platform. Indiegogo offers use of flexible marketing tools, integrated data, and flexible billing options.
- Fundable: Crowdfunding for entrepreneurs to launch a new business or raise capital. Payment to project backers can come as company equity instead of the usual crowdsourced project rewards.
- CircleUp: Online platform for United States-based companies to find backers. Companies receiving backing produce tangible products and give samples to financial backers investing in the project.
- MicroVentures: This company, founded in 2009, combines crowdfunding with venture capital for business startups. Angel investors back vetted projects at venture capitalist style rates.
- YouCaring: Platform for personal funds including school tuition, medical bills, adoption, and funeral expenses. The site is free to use, but those requesting funding pay a donation processor charge.
- CrowdRise: Online community for raising money for causes, emphasizing global citizenship. CrowdRise calls itself “the world’s largest community for raising money for great causes.” There are no minimum goals and campaign deadline requirements.
- Kiva: Non-profit organization for individual loans or team funding for low-income or underserved world populations. Loans carry affordable interest rates with funding in 86 countries worldwide.
The SBA: Ultimate Back of SBA Microloans
Due to the popularity and need, the Small Business Administration (SBA) now offers microloans.
The SBA microloan program offers small businesses start-up and expansion loans.
Business loan amounts average $13,000 and they have a maximum loan amount of $50,000. Community-based intermediary and local organizations offer the microloan funding.
Established businesses or startups apply for a microloan through their area intermediary organization. Find intermediaries in your area by contacting the district office of your local SBA.
When You Can’t Get a Traditional Loan, Consider Microloans
SBA Microloans For Felons
Even when the banks say no, getting a loan for your small business is still possible.
Microloans come to the rescue with more relaxed qualification criteria and sometimes, better financing rates and options.
No matter what you do, don’t go into any business loan blind. These options are not always good for every situation, so do your homework and check out the options we’ve given you.
Consider your needs and your financial goals, then choose the financing plan that best suits your business.