The world of small business finance has changed a lot over the last several years as traditional lenders like banks have focused more on larger more established small businesses in need of larger loan amounts. Today, for a number of reasons, many banks are reluctant to issue loans under $100,000 or lend to a business that doesn’t do $1 million or more in annual revenues.
As the average loan size for a typical bank loan continues to go up, the needs of the smallest 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 micro-loan. Fortunately there are numerous online lenders, as well as non-profit micro lenders, who regularly work with borrowers looking for loan amounts as small as $5,000 to $50,000.
Non-profit micro-lenders 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 non-profit micro lenders 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 business.
Micro-Lenders Come in Different Varieties
The SBA’s micro-loan program offers loans up to $50,000 to help small businesses through non-profit 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 micro-loan program is about $13,000.
SBA micro-loans can be used for things like 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 micro-loan is six years. “Interest rates vary, depending on the intermediary lender to the intermediary from the U.S. Treasury. Generally, these rates will be between 8 and 13 percent,” says the SBA.
Federally licensed Community Development Financial Institutions (CDFIs) access private and public funds when lending to small business owners. And, as the name implies, they focus on businesses that have the potential to impact developing communities and low-income borrowers.
Are Micro Loans Strictly for Un-bankable Borrowers?
The short answer is no. There are a number of reasons a small business owner might decide to pursue a micro loan. Today, banks don’t typically want to deal with the smaller loan amounts (even for creditworthy borrowers), and in some circumstances many micro lenders are willing to work with startups the bank would shy away from, as well as small business owners who just don’t meet the rigid lending criteria of a bank. For example, in the state of California, anything under $5,000 is considered a consumer loan.
Many non-profit lenders have working relationships with local banks that want to maintain their deposit relationships, but aren’t able to provide a business loan to these 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 the 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 micro loan from a non-profit lender.
Micro Loans Fill an Important Niche in the Communities they Serve
Micro lenders help the smallest small businesses access capital that might have difficulty finding funds from other sources. Generally speaking, if your business can demonstrate an ability to make the periodic payments, you haven’t declared bankruptcy in the last 12-24 months, and are current with your personal debt obligations, you may be able to qualify for a micro-loan from a non-profit lender even if you have a less-than-perfect personal credit score.
The smallest small businesses often aren’t served well by traditional lenders—making non-profit lenders an important part of the small business lending landscape.
OnDeck Offers Small Business Loans from $5,000 to $500,000
If you’ve been in business for at least a year, have a healthy business with annual revenues 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.
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 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 is based solely upon the creditworthiness of the applicant.
Many small business owners are interested in a loan for their business but don’t have the specific collateral a bank may require, such as specifically-identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that do not require that their loans be secured by specific collateral, relying instead on a general lien on the assets of the business. These may be good options for many businesses.
Secured Small Business Loans
Banks generally prefer secured—rather than unsecured—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 percent of the value of appraised real estate or 60 percent to 80 percent 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 upfront or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and we offer tailored loan options (with multiple loan types, amounts, and repayment terms), so you can get a 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 available to them.