Three weeks after the February 2016 launch of New York-based event marketing company The XP Agency, the company landed its first client.
“In order to complete the project, we needed $60,000 to pay for our upfront costs of producing the event,” co-founder Tamara Francois says. “Neither my business partner or I had the funds to cover these costs, so we sought a business loan.”
Traditional lenders turned them down, so Francois went to an alternative lending non-profit called Community Capital, which offered microloans — small short-term loans designed to give small businesses working capital. After submitting their business plan and proof that they had a signed contract from a major corporate client, The XP Agency secured a $10,000 microloan and a $100,000 line of credit. “I don't think we would have been able to sustain our business without it,” Francois says.
Microloans can transform business for small companies such as The XP Agency. The Small Business Administration has a microloan program that works with non-profit community organizations across the country to provide loans to local small-business owners. While microloans are typically $50,000 or less, businesses in regions that have less access to capital may qualify for up to $250,000.
The maximum repayment period for SBA microloans is six years, and the average SBA microloan in 2016 was $13,533. But the SBA is not the only game in town.
The microloan market has evolved in the past five years, says Antara Dutta, a social entrepreneur and mentor with the Delaware chapter of SCORE, a volunteer network of small-business advisers. Many non-profit organizations, foundations and peer-to-peer lending networks have also entered the microloan market.
One such company is Funding Circle, a San Francisco-based lending platform that connects investors with small-business owners. “Banks have really pulled back from doing small-business loans over the past decade,” says Sarina Siddhanti, Funding Circle’s U.S. Head of Commercial. “We fill that gap.”
While Funding Circle awards business loans up to $500,000, they also offer microloans to entrepreneurs who need less. One of those entrepreneurs was Bret Morey of Charlotte.
Morey and his son, Elijah, were bit by the business bug in 2014, thanks to their mutual love for hot peppers. When Elijah was 12, he asked his father if they could create their own hot sauce. That led to the launch of hot sauce company Elijah’s Xtreme. After creating another sauce in 2016, Morey ran into a problem most business owners experience when moving from one level to the next.
"You're using the profits from the one sauce to fund the other, and it really stretches your income and ability to grow,” he says. To create additional products, Morey sought out a $25,000 microloan from Funding Circle and used the money to develop a new marinade and a gift set. Without the funding, the company wouldn’t have been able to expand its product line, Morey says.
The types of businesses that benefit from microloans are those that need cash for a specific purpose, such as buying new equipment, expanding the marketing program or stocking up on inventory before a busy season, Siddhanti says.
Small-business owners can also use microloans to build up their business credit history, Dutta points out. “You borrow small, and pay it back. Then as your business grows, larger banks will talk to you about larger lines of credit,” Dutta says.
Some organizations offer microloans to people who fall within certain demographics, such as minorities or women.
Robyn Porteen of Grand Rapids, Mich., received a $35,000 microloan from the Grand Rapids Organization for Women for her custom bag design company Porteen Gear. In 2010, Porteen was an international photographer who wanted a camera bag that was classy, yet inconspicuous — so she designed her own. “It was kind of the trailblazer for designer camera bags,” she says.
When the product took off, she needed a commercial sewing machine, a website that would let people custom design their bags, and part-time help, which the microloan paid for.
One of the best things about microloans is that they allow small businesses to grow at their own pace, says Porteen, who paid off her microloan in five years. “A smaller loan felt safer. I didn't want to put all of my ducks into one big loan and then not be able to pay it.”
How to qualify for a microloan
Every microloan lender has its own requirements, but here is what you can do to improve your chances of getting approved.
*Document your plans. Have a business plan as well as detailed documentation about how you plan to use the microloan, Dutta says. Also show how long it will take your business to recoup the funds to pay back the loan.
*Show a pattern of growth. “What we will look for first and foremost is solid business financials, which means we want to look at companies whose bottom-line profits or revenues have been growing,” Siddhanti says.
*Don’t neglect your credit. Entrepreneurs who have less-than-stellar credit have a better chance of getting a microloan than they might a traditional small-business loan because the requirements tend to be less stringent, Dutta says. But having good credit can only work to your advantage.