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How Microlending Can Help Small Businesses: What You Need to Know

· money,loan,funds

Many small business owners find themselves in a pinch when trying to raise funds, and they often have to seek out non-traditional sources of funding for their companies. For business owners who are unable to obtain funds from a traditional bank, microloans may be the way to go.

Similar to peer-to-peer lending, microloans (also referred to as microcredit) are small loans issued by non-bank entities instead of traditional banks. Microloans may be funded by one person or several people or entities, with each providing a portion of the total amount.

Understanding Microlending

Microlending initially came onto the scene as an alternative to traditional bank financing, which credit-challenged entrepreneurs were often denied. Borrowers with a less than ideal credit history may be able to find financing in the microlending arena.

This is because these lenders take into account several factors when determining loan qualifications including revenue, business goals, and other factors that could determine an entrepreneur’s repayment ability. As with peer-to-peer lending, microlenders tend to want to know the person behind the company when it’s time to make a decision.


Kiva is one of the most popular micro platforms thanks to its ease-of-use, its relative popularity, and easy repayment terms. Kiva works by allowing participants to loan money in increments of $25 and up to aspiring business owners in the Kiva database. Loans generated through this process are seen as traditional loans with strict repayment terms, and repayment rates are strong.

The Small Business Administration (SBA) also offers microloans, though their criteria differ from other companies. The SBA involves acts as an intermediary between the borrower and the actual lender, and credit requirements vary greatly by lender.

In general, the lenders that work with the SBA require collateral as well as a personal guarantee from the borrower. SBA microloans are generally not available to anyone who has previously defaulted on a government-issued loan, though the SBA notes that most people who are able to explain prior financial difficulties in writing still stand a chance of getting approved.

Another microlending platform is PayPal Working Capital. Since PayPal currently serves more than 152 million accounts, they have a significant amount of leverage in the field.

PayPal Working Capital offers borrowers loans ranging from $5000 to $60,000, allowing them to be repaid based on a fixed percentage of monthly sales. This percentage is not broadcast openly on the PayPal Working Capital website, but the company insists that the percentage of sales model gives business owners a great deal of flexibility, particularly early on when sales may be slow or difficult to forecast.

PayPal Working Capital requires no credit check, as PayPal is able to get a good look at typical sales if the business owner has already been using PayPal to process customer transactions. Once approved through PayPal Working Capital, the borrower usually has access to funds within minutes.

PayPal Working Capital also monitors all loan accounts for repayment activity. This monitoring will help business owners stay on track with repayment. Should the business owner run into any issues, PayPal Working Capital representatives will contact the owner to make arrangements rather than allow them to get further behind.

What Borrowers Need to Know about Microlending

Before applying for microloan, there are a few things to consider. It is always a good idea to research any microlender or web-based lending platform. If you are credit challenged, it will be critical to find a microlender that also reports to one or all of the major credit bureaus, as timely payments will raise your credit profile. Also, be sure to compare the rates between microlenders to ensure you are getting the best deal possible.

Once you select a microlender, ensure that your business affairs are in order and ready to be presented. The microlender will want to understand the nature of your business, where you see your business in the future, as well as current and projected revenue.

In addition to the business side, be sure that you are able to clearly communicate your personal story and what is driving you to want to be a business owner. In some instances, it may be important for you to have a co-borrower lined up in the event that you don’t qualify on your own.

When applying for a microloan, the required documentation is generally the same as it would be for any other loan. Potential borrowers will be required to present government-issued ID, proof of income or cash flow, purpose of the loan, and a business plan, as well as proof of any investment capital that has already been received. Additional information may be required based on the lender’s standards.

These are just a few of the available microloan options out there for aspiring entrepreneurs who may have faced credit challenges in the past. Provided you do proper research and meet the criteria, you will likely be able to find the microlender that’s right for you.

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