Small Business Microloans: Get Money When the Bank Says No

Need a loan for your small business? When the bank says no, a microloan may be the answer for the funding you want. This guide to microlending includes a number of sources for microloans.

When you hear the term “microloan,” you might think of something having to do with size. A microloan must be really small, right? In some cases, yes, but that isn’t necessarily true. If you want to know more about microlending, we have the information you need right here.

What is microlending?

Microloans are small loans often used by businesses that can’t get a traditional business loan from a bank. Muhammad Yunus, a Bangladeshi economist and winner of the 2006 Nobel Peace Prize for his work, is considered the first person to put microlending as we know it today into practice, lending money to women and men who couldn’t get loans from banks.

He started Grameen Bank, which lent largely to Bangladeshi women to buy cows, seeds, retail goods, and just about anything else to start a business. Today that idea has grown to massive proportions. Sites like Kiva still largely follow Yunus’s original idea, but microloans are now available to entrepreneurs of just about any size. 

Sources of Microloans

Because microlending has proved successful, there are now numerous sources of funding.

Small Business Administration

The United States Small Business Administration (SBA) has a microloan program that provides loans of up to $50,000 to small businesses for startup and expansion. The average loan amount is $13,000. The funds are provided through local, community-based intermediary organizations, and businesses and startups that wish to apply for microloans need to do so through their local intermediary organization. Names of those intermediaries can be obtained from your local SBA District Office.

OnDeck

OnDeck Capital provides short-term working capital loans for small businesses. The loans are true term loans, not merchant account advances or any other type of cash advance. OnDeck uses different criteria to determine eligibility for a loan than most banks do, making it possible for some small businesses to qualify when they wouldn’t through more traditional sources. Business owners can apply for their loans online or over the phone and get funded in as little as one business day. OnDeck requires businesses to be open at least one year with revenues of at least $100,000 to apply.

Kabbage

Kabbage is yet another source of money for small businesses, offering a line of credit that can be used for purchasing inventory, funding payroll, and other small business needs. What makes Kabbage unique is that it uses real-time data to make an instant lending decision about a business. Instead of putting all the weight on the credit score, it may look at your Quickbooks Online data, PayPal, or eBay accounts. Later, it may up your credit limit by examining your Facebook or X (Twitter) accounts. All lending decisions are made automatically through its computer algorithm.

Lending Club

If you have a credit score of at least 660, you may be able to borrow up to $35,000. Lending Club is a peer lending site where you borrow directly from other members. You avoid the hassle and expense of going through traditional lenders while investors can see returns of 9% or more.

Prosper

Prosper and Lending Club are similar organizations. Prosper makes peer loans of up to $25,000 and requires the borrower to have a credit score of at least 640. Investors can fund as much of the loan as they would like until the total amount is raised. The borrower then makes monthly payments.

Crowdfunding Sites

Crowdfunding and microloan programs are similar in their mission to loan to those who don’t qualify or don’t want to get a bank loan, but different in how they help you reach that goal. A microloan is a monetary loan that has to be paid back in cash. It may come from multiple sources, but at its core, it’s a loan where interest has to be paid.

Although the differences are becoming increasingly blurred, crowdfunding is more often a type of grant where the person doesn’t repay the funds.

Kickstarter

Kickstarter isn’t going to fund your business itself, but if you have a creative project, this is the place to go to raise money from potential individual donors. Your project has to be 100% funded by a certain date in order to receive funding, and you retain complete ownership of the work.

In return, the creator will often offer a product or service in return for the funding. If a band is asking for money to produce an album, the donors might get an autographed CD, for example.

Indiegogo

Indiegogo is similar to Kickstarter, but it has an option to receive funds even if the announced funding goal isn’t reached. 

Crowdfunder

Crowdfunder participates in a new kind of crowdfunding called equity crowdfunding. Equity crowdfunding blurs the lines between microloans and crowdfunding, but there are still differences.

Equity crowdfunding allows any number of investors to fund your business needs. As laws change, this model is evolving into both debt-based financing (like a microloan) or equity-based, where the investors take a stake in your company. Crowdfunder calls this “crowdfunding 2.0.”

How do I qualify for a microloan?

Microloans may use technology to add a modern twist, but all loans have the same basic rules. You have to demonstrate a track record of responsible financial behavior in your business and professional life. If you have other loans, pay them on time. Take steps to elevate your personal credit score, and provide plenty of evidence that your business is growing. Finally, explore the various options to find the one that best fits your needs.

RELATED: Need a bigger loan? Read about SBA 7a loans.

Once you have the funding you need, take further steps toward business profits by making sure your customers are paying you. Our ZenBusiness Money app makes it fast and simple for small business owners to get paid. You can use it to easily send custom invoices, accept credit card and bank transfer payments, and manage your clients from an easy-to-use dashboard.