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How to use microloans to grow your business

The ins and outs of accessing microloans and putting them to good use


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Small businesses need capital to grow, and cash flow is rarely enough to cover the investment that opportunity requires. That’s where external financing often comes into play. It might come as a surprise how far a small sum of borrowed capital can move your business forward.

Microloans offer an ideal balance of accessibility and affordability for small business growth. Here are all the details you need to figure out if microlending is the right source of capital for your business trajectory.

First, what’s a microloan?

A microloan is a type of business loan that offers smaller amounts of capital — typically less than $50,000 but sometimes as small as $500. Microloans are one-time lump sums that the borrower pays back, plus interest, with regular payments over an agreed-upon repayment schedule.

Microloans function much like traditional, larger business loans, but their smaller size means different outcomes for small businesses. Because they offer smaller sums of capital, microloans tend to be, (compared to bigger term loans):

  • Easier to qualify for
  • Quicker to fund
  • Lower in overall cost of capital
  • Shorter-term funding

As a result, microloans offer quick, affordable funding that is perfect for the one-off capital injections small businesses often need to grow.

Three top microloan options to consider

Many microlending programs exist specifically to offer smaller sums of capital that are easier for less qualified business owners to access. Microloans typically have minimum requirements that are more hospitable for small businesses that find it difficult to qualify for larger, more traditional business loans.

Those requirements might mean lower minimum business and personal credit scores, less annual revenue and less time in business, among other considerations specific to the lender.

So, if you’re looking for a quick injection of capital to grow your business, but you’re working with less-than-stellar qualifications, these top three microlending programs will be solid funding options for you:

SBA Microloans

A go-to source of microloans for small businesses all over the U.S. is the SBA Microloan Program. Through this program, the SBA provides funds to nonprofit intermediary lenders who then funnel the capital to local small businesses in the form of microloans of up to $50,000. SBA Microloans have a maximum repayment period of up to six years and interest rates that range between 8% to 13%.

PayPal Working Capital

Small businesses that accept payments through PayPal are eligible for microloans through PayPal Working Capital. With this program, businesses can qualify for up to 35% of their annual PayPal revenues. Borrowers repay through a daily percentage of their PayPal sales until their borrowed sum, plus a fixed interest fee, is repaid in full.

The stand-out feature of PayPal Working Capital is its qualification requirements: PayPal simply evaluates applications based on PayPal history. So, in contrast to your typical microlending program, PayPal Working Capital doesn’t require any credit checks or bank statements.

LiftFund

Another source of microloans for small businesses to consider? LiftFund. They’re a southern nonprofit organization who works as an intermediary in the SBA Microloan Program, but they provide their own, non-SBA microloans, as well. Since they aren’t administered in concert with a government entity, LiftFund microloans will offer more flexible financing than their SBA counterparts.

Before applying, make sure you’re living or have lived within one of the 13 states LiftFund serves. Also note that any defaulted credit accounts or late payments on a mortgage or an auto loan could disqualify you from this microloan option. But other than that, if you’re running a small business within the Southeast region of the U.S., LiftFund could be the perfect microlender for you.

Typical microloan growth use cases

Now that you’re familiar with your top microloan options, you can begin to envision the growth they’d enable for your small business. What’s that one lever you’d pull, if only you had the capital to do so? If you need some inspiration, here are some typical use cases that small businesses often put the proceeds of microloans towards:

  • Stocking an inventory shipment
  • Taking advantage of bulk deals
  • Financing a new hire
  • Seizing a contracting opportunity
  • Launching a marketing campaign

Some notable exceptions to SBA Microloans are purchasing real estate or paying existing debts on an existing loan. Most other business use cases should be fair game, though you’ll discuss specifics with your lender during the application process.

Financing your growth with a microloan: Final thoughts

There you have it — all the ins and outs of accessing microloans and putting them to good use. By borrowing capital in the form of a microloan, your business will be able to access financing without taking on mountains of debt. With one, quick injection of capital, your small business could seize the growth opportunities you’ve always wanted to seize.

Eric Goldschein is an editor and writer at Fundera, a marketplace for small business financial solutions such as small business loans. He covers entrepreneurship, small business trends, finance, and marketing.

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