When you’re running a small business, finding funding can be a daunting process. It can be tough to get a bank loan or convince an investor to get on board when your company is small or new. Lots of small businesses need funding but can’t get it from traditional banks or investors. That’s where microloans come in.

This guest article was provided to us by Accion. Accion is a nonprofit that provides microloans to small businesses. You can read more about them at the bottom of this post or visit their site here.

What Is A Microloan?

As a business owner, you probably know what a loan is. A microloan is exactly what it sounds like – small loans for small businesses made by designated lenders. In general, microloans are for less than $50,000 and are used to help cover startup costs and other early expenses for small businesses and not-for-profits. Accion’s average loan, for example, is for $10,000. To give some context, the average general small business loan amount given by the SBA in 2015 was more than $370,000. So, a microloan may be a good option if you want to borrow a smaller amount.

Microloan funds are distributed by designated community-based non-profit intermediary lenders. In addition to providing small business financing, many of these lenders also provide management and technical assistance to their clients.

Qualifying For A Microloan

It’s generally easier to qualify for a microloan than for a traditional business loan. The programs are geared toward helping new and small businesses, so the requirements are more flexible. As with traditional loans, the specific eligibility requirements differ from lender to lender – the business you’re in, your track record, the amount of the loan you need, how old your business is, and other factors may all affect your eligibility with a given lender. Microlenders will work with you to learn about you and your goals and take that information into consideration when evaluating your loan application. That’s one of the biggest differences between microlending and traditional lending – it’s about your character as a business person, not just your credit score.

Where To Get A Microloan

Before you apply for a loan, you should shop around and see what different microlenders require and offer. Some microlenders operate nationwide while others specialize in particular geographic areas, types of businesses, or loan sizes. Accion and the SBA operate nationwide, for example, while the Opportunity Fund focuses on California and the Business Center For New Americans offers microloans to immigrants in New York. The SBA maintains a list of microlenders in each state, so that’s a good place to start when you’re looking for lenders in your area. Each will have its own requirements for loan applications – you’ll need to be aware of the requirements so you don’t turn in an incomplete application. Doing some research up front can save you a lot of time applying for loans with lenders that aren’t a good fit for you.

Applying For A Microloan

Once you’ve narrowed down your choices, it’s time to reach out to the lenders and ask about a loan. When you apply, you’ll need to provide some financial information about your business and yourself. That may include your personal pay stubs as well as information about any unpaid debts you or your business have. You’ll need to show that your business has enough cash flow to cover the payments on the loan you’re asking for, which means you’ll need evidence of your current income as well as a business plan describing what your operation will look like going forward.

Once you turn in your application, you’ll hear back from the lender within a few days about what other documentation you need to provide and how to proceed with the application process. After that, the time it takes to receive the funds will vary depending on your circumstances. In some cases, the lender may want to inspect your home office or storefront to make sure that it’s legitimate and well-organized. Your lender may also require personal collateral for the loan, which will have to be assessed to ensure its value. That can extend the timeline of the application process. In other cases, the application will be straightforward and won’t take as long. Ask your lender when you apply about how long she expects the process to take.

If you’re not approved right away, ask the lender what you can do to strengthen your application and when you should reapply. If you are approved, then it’s time to talk terms.

Microloan Terms

Just like with a traditional loan, you’ll have to agree on repayment terms with your microlender. The most important terms include:

• Interest rate
• Repayment schedule
• Length of the loan
• Restrictions on use of the funds

The SBA allows up to 6 years for repayment of your microloan. Interest rates typically range between 8% and 13% depending on general economic conditions and your business’s financial circumstances.

The terms your lender offers will depend on how much you’re borrowing, what you’re using it for, their own institutional lending requirements, your financial history, and the state of your business. If you don’t think the terms are fair or workable, you can always negotiate. You know your business better than the lender can from just reading your business plan, so you may be able to convince the lender that you deserve better terms.

Whatever the terms, you should read them all carefully and make sure you understand everything about the loan before you make a decision. The lenders are there to help you and can explain anything that isn’t clear. Taking on a loan is a big decision and you need to have complete information before you commit. Once you’re approved and sign the closing documents, the money will be deposited in your bank account or sent to you by check.

Is A Microloan Right For My Business?

The answer depends, of course, on your circumstances and needs. Any kind of business can take out a microloan – restaurants, retail shops, salons, and more. Microloans are often a good fit for sole proprietorships, businesses with few employees, women-owned businesses, minority-owned businesses and other businesses that have trouble getting access to traditional lending. They’re great if your business is very new and you don’t have a long credit history or if you only need a small loan. They’re also a good way to build up your credit so that you can get lower interest rates and more options with later rounds of funding. If your business needs a small loan and you don’t have access to a traditional bank loan, a microloan might be the best choice for you.

If you’re considering seeking a microloan, ask yourself these questions:

Is Traditional Lending An Option?

A microloan may be right for your business if traditional lending isn’t a viable option. Traditional business loans require a good credit score and a strong track record for your business, both of which can be tough for new entrepreneurs and small business owners. Maybe your business is new so you don’t have a long credit history. Maybe you’ve had credit troubles in the past and are trying to repair your score. You can use the funds to grow your business while you build your credit score, opening up more funding options in the future.

How Will I Use The Funds?

When deciding on funding, you’ll also need to consider how you’re going to use the money. Microloans can be used to purchase or lease equipment, for office space or furniture, for machinery or tech needs, and even for working business capital. If that’s what your business needs, a microloan might be the right choice. Some lenders restrict the uses of the funds – the SBA doesn’t allow you to use microloan funds to purchase real estate, for example. You’ll need to talk to your lender about any restrictions on the use of the money.

How Much Money Do I Need?

Finally, consider the size of loan you need and can handle. Traditional business loans tend to be substantial, often in the 6-figure range or higher. You may not need that much of a loan. You may not want that much of a loan – large debts mean large interest payments that can make it tough to keep your head above water. Taking on too large of a loan can also hurt your credit score.

Get Funded!

Dealing with funding is often one of the more frustrating aspects of running a business. Traditional loans may not be an option, especially if your business is small or new. The good news is that you have other options, including microloans, for getting the cash you need to keep your business growing. Whatever kind of funding you pursue, remember to shop around and check out all of your options to make sure you get the best possible fit. Talk to lenders (both traditional and micro), other business owners, and your financial advisors to learn about all the available choices for funding your business.

Many thanks to Accion for contributing this post and sharing their insight and expertise around this topic. As the largest nonprofit micro- and small business lending network in the United States, Accion connects small business owners with the accessible financing and advice it takes to create or grow healthy businesses.