-Common sense might suggest that when it comes to applying for a business loan, getting a small amount of money would be easier than borrowing a bigger sum. But, although true in some cases, it isn't in all.
Why? Unfortunately, smaller loan requests generate less profit for banks, which makes it less enticing for them to process. In fact, it costs them just as much to underwrite a large loan as it does a small loan.
So what are your options if need only a relatively small amount of cash? Online lenders are one, as technology helps bring down their underwriting costs. Another is to consider applying for a microloan.
A microloan is a shorter-term loan with a low-interest rate, typically found through the SBA or a non-profit lender.
Not sure whether you'll qualify for a microloan, or how to apply? Read on below for all the details you need to know.
The SBA Microloan Program
In an effort to combat the lack of funding from traditional brick and mortar banks, the U.S. Small Business Administration partners with local, intermediary lenders to fund small loans between $3,000 and $50,000.
Although funding for SBA-backed microloans does come from the Small Business Administration, the SBA itself does not directly service the loans to their borrowers.
In order to apply for an SBA microloan, you'll need to apply through a local intermediary lending organization. These lenders are typically non-profit, community-based organizations with experience in lending, management, and technical assistance for small business owners.
Each intermediary lender has its own lending and credit requirements, but you'll typically be required to provide some form of collateral as well as a personal guarantee.
You can find a list of participating lenders on the SBA website.
Repayment Terms Interest Rates and Fees
The terms of your microloan may vary based upon the loan amount, the planned use of funds, your needs as the borrower, and the standards of your intermediary lender. However, the maximum term of repayment for SBA-backed microloans is six years.
Your SBA microloan can be used for startup and expansion, working capital, inventory, supplies, fixtures, machinery, or equipment. While loans are available for up to $50,000, your borrowing amount will depend on your intended use for the loan and be directly negotiated with your intermediary lender.
The interest rates vary between intermediary lenders, but generally these rates fall between eight and thirteen percent.
Why Apply and Who's Eligible?
As a small business owner, it's hard enough to qualify for a traditional bank loan. Add in being a first-time borrower looking for a small sum of financing, and odds are even less in your favor.
This is where the SBA Microloan Program comes into play. If you're a small business with funding needs too small to be serviced by your local bank, but too high to rely on a business credit card, a microloan could be your best bet for an affordable borrowing alternative.
Although microloans are recommended for small startups with limited capital requirements and little to no revenue history, any registered business can qualify. There are some lending organizations that give priority to low-income applicants, minority-owned businesses, and women-owned businesses.
Qualifying for an SBA Microloan
Since the microloan program was created to help the first-time borrower and those with little to no business credit history, the lending standards are much less stringent than for other loan programs through the SBA. This, however, does not mean that everyone who applies will qualify for funding. If you want to put yourself in the best position to qualify for a loan with the lowest interest rate possible there are a few steps you'll have to take.
1. Pay Attention to Your Credit Report
Although lenders aren't expecting a long history of business credit, you'll still want to make sure your personal credit report is in the best shape possible. After all, the better your credit, the better your chances are of receiving approval for a loan.
If you want to give your credit score a quick boost, try paying down some of your debt and increasing your credit limit.
2. Prepare Your Business Plan
Particularly if you're a microloan borrower with little to know business history, your business plan will be especially important to your microloan application process.
Your business plan should tell lenders who you are, how your business makes money, your intended use for the loan and, most importantly, how you plan to repay the loan. If you need help formulating your business plan, check out a business plan software like LivePlan.
Alternative Microfinance Providers
While the SBA is the main source of microloan funding, there are also alternative microfinance providers that may be worth considering. If you're working with a non-SBA backed lender, do your research to make sure the lender is reputable, that the interest rates are reasonable, and that you're getting a good deal for your business.