The world of small business finance has changed a lot over the last several years as traditional lenders like banks have focused more on well-established small businesses in need of larger loan amounts. Today, for a number of reasons, banks are often reluctant to issue loans under $100,000 or lend to a business that doesn’t do $1 million or more in annual revenue.
As the average loan size for a typical bank loan continues to rise, the needs of many small businesses continue to remain modest by comparison. Most lenders, including those that are part of the SBA loan guarantee program, consider a loan size under $50,000 to be a microloan. Fortunately, there are numerous online lenders, as well as nonprofit microlenders, who regularly work with borrowers looking for small loan amounts ranging from $5,000 to $50,000.
Nonprofit microlenders focus on small businesses that have the potential to provide an economic impact in the community or businesses that can leverage the smaller loan amounts into a big impact within their businesses. These nonprofit microlenders often include very favorable loan terms along with very low or even no interest, along with advice and mentoring to help business owners build successful companies.
Microlenders Come in Different Varieties
The SBA’s microloan program helps small businesses access loans up to $50,000 through nonprofit community-based organizations with experience in lending as well as offering management and financial assistance to borrowers. According to the SBA, the average loan amount in the SBA microloan program is about $13,000.
SBA microloans can be used for working capital, inventory, fixtures, machinery and equipment. Repayment terms can vary depending on the intermediary lender and the needs of the small business borrower. The maximum repayment term allowed for an SBA microloan is six years. Interest rates vary, depending on the intermediary lender to the intermediary from the U.S. Treasury. Generally, these interest rates will be between 8% and 13%, as stated on the SBA website.
Federally licensed Community Development Financial Institutions (CDFIs) access private and public funds when lending to small business owners. And, as their name implies, they focus on businesses that have the potential to impact developing communities and low-income borrowers. These can include recovery centers and other types of healthcare businesses as well as multifamily housing providers that offer on-site community services. Funding from CDFIs is primarily intended to provide financial opportunities to small businesses underserved by traditional banking institutions. CDFIs can range from both community development banks and credit unions to nonregulated sources like loan and venture capital funds. The type of microloan program, as well as the interest rates and loan terms that are offered, can depend on the institution. Nonetheless, CDFIs can be a good option for small businesses that are looking to make a positive difference in their local neighborhood.
Are Microloans Strictly for Unbankable Borrowers?
The short answer is no. There are a number of reasons a small business owner might decide to pursue a microloan or apply for a microloan program. In some cases, small business owners may need financing to cover temporary cash flow gaps and find that a microloan best suits their purposes. Microloans can also offer competitive interest rates, which may be more appealing to certain borrowers. For instance, microloan programs like the one offered by the SBA can provide loan terms and interest rates that may make repayment more manageable for small business owners. While interest rates and loan terms can differ widely among microloan programs, they are generally designed to help small businesses expand, rather than simply aid those who have trouble with repayment. In fact, funding from the SBA microloan program can’t be used to pay off existing debts, so microloans aren’t necessarily intended for borrowers with poor credit history.
In some circumstances, many microlenders may be willing to work with startups that a bank may potentially shy away from, as well as small business owners who may not meet the business lending criteria of a traditional bank. For example, in some states, only consumer microloans may offer the smaller loan amounts that a business owner needs.
Many nonprofit lenders have working relationships with local banks that want to maintain their deposit relationships, but aren’t able to provide a small business loan to business owners. Borrowers who might be looking for a $3,000 or $5,000 loan might be pushed into a credit card account for these smaller loan amounts at a local bank. However, that very small loan amount, in the right hands, has the potential to create jobs, build a business and strengthen a community. In other words, even very “bankable” businesses may qualify for a microloan from a nonprofit lender.
Microloans Fill an Important Niche in the Communities They Serve
As mentioned above, microlenders can sometimes offer access to capital for small businesses that might have difficulty finding funds from other sources. Generally speaking, if your business can meet certain criteria, you may also be able to find a microloan offered through a nonprofit lender that is willing to work with your credit score.
Far too often, small businesses aren’t served well by traditional lenders — making nonprofit lenders an important part of the small business lending landscape.
OnDeck Offers Small Business Loans From $5K to $250K
If you’ve been in business for at least one year, have a healthy business with an annual revenue of at least $100,000, and a good personal and business credit profile (even it it’s less than perfect), an OnDeck loan could make sense for you.
Similar to a microloan, an OnDeck Short-Term Loan can offer you a one-time lump sum of cash to use for your small business expenses. Plus, you could have funds in your bank account as early as the day your loan is approved*, and you can pay it back on your schedule. With loan amounts ranging from $5,000 to $250,000 — and repayment terms up to 24 months — OnDeck makes it simple to customize your loan to fit your specific needs.
What Type of Loan Makes Sense for Your Business?
Financing Options to Help You Grow Your Business
If you’ve ever heard the adage, “It takes money to make money,” you must be a small business owner. Fortunately, there are more small business loan options available today than ever before — you just need to know where to look and what to look for. You don’t need to be a financing expert to build a successful business, but you do need to consider all the business loan options available to determine which one is best to meet your business need.
Unsecured Small Business Loans
An unsecured small business loan is simply a loan from a lender that does not require any form of collateral from a business or a business owner. This type of loan is based primarily upon the creditworthiness of the applicant.
Many small business owners are interested in a loan for their business but don’t have the exact collateral a bank may require, such as specifically identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that offer different types of financing, such as a business line of credit. These may be good options for many businesses.
Secured Small Business Loans
Secured loans are loans that are backed with some sort of collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.
Banks (or other lenders that require specific collateral) commonly determine what they refer to as the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow against 75% of the value of appraised real estate or 60% to 80% of the value of what they call ready-to-go inventory. Because lenders might consider their loan-to-value ratios differently, you’ll need to ask any potential lender how they intend to set that value.
Small Business Loans for Different Industries
As a business owner, your needs may be industry specific such as ordering kitchen supplies up front or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and can offer tailored loan options with multiple loan types, amounts and repayment terms, so you can get a small business loan best suited for your industry and business. Here are some of the most common industries we work with and the small business financing options that are available.
*Same Day Funding is only available in certain states, for term loans up to $100K. Eligibility window is Monday-Friday before 10:30am EST. If checkout is done before 10:30am EST, funds will be available by 5pm local time the same day. If checkout is done after 10:30am EST, or on a weekend or bank holiday, it will not qualify for Same Day Funding and funds will be deposited within 2-3 business days. Eligibility rules around creditworthiness and length of term loan apply.