It’s not always easy for small business owners to pinpoint the best lender for a microloan of under $50,000.
After all, most major banks are reluctant to make loans for these smaller amounts. Surprisingly, it costs banks approximately the same amount to process a $50,000 loan as one for $10 million. However, higher amounts mean more money at the end of the day for banks since larger loans are usually longer term.
But small business owners seeking lower amounts to borrow should not despair. There are many other options to borrow amounts under $50,000. The following are a few places to see where you can get the best deal for your situation.
SBA Microloan program
The U.S. Small Business Administration (SBA) Microloan program provides loans up to $50,000 to help small businesses start up and expand. The average microloan is about $13,000.
The agency provides funds to specially designated intermediary lenders − nonprofit community-based organizations with lending experience. These intermediaries administer the microloan program for eligible borrowers. Under this program, microloans can be used for:
Inventory or supplies
Furniture or fixtures
Machinery or equipment
Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.
You must work with an SBA approved intermediary in your area to apply for this loan program. For more information, see the list of Participating Microloan Intermediary Lenders.
The SBA program generally provides small business owners with good terms and interest rates. However, it should be noted that documentation requirements for these programs can be burdensome, and often the waiting period before a decision is made can be a long time.
Alternative Financial Services
More small business owners are turning to alternative lenders for outside financing. That’s because the application process is very easy and decisions are often made within a day. Alternative lenders are happy to make loans for a wider range than banks. For example. BFS Capital makes loans from $5,000 to $500,000 for many industries, including those identified as too risky by many major banks, such as restaurants.
BFS focuses loan decisions based on the small business’ cash flow. You will need to be in business for at least nine months and generate a minimum monthly sales volume of $7,000. Your personal credit score must be at least 550. There are fewer restrictions on what loans can be used for, compared with the SBA program.
However, you must be careful in selecting an alternative lender. Interest rates charged by most alternative lenders are higher than traditional bank loans. Also, the growth spurt in the industry, partially fueled by a willingness to make loans for smaller amounts, means that not all alternative lenders are above board. You need to examine the reputation of the lender and accreditations. For example, BFS has an A+ rating with the Better Business Bureau (BBB).
There are other options if you are seeking a microloan for your small business. In recent years, Crowdlending or Peer-to-Peer (P2P) lending has received a lot of publicity. Under this approach, small business owners go through online services that match borrowers directly with lenders. The interest rate is set by lenders or fixed by the intermediary company.
The rates are typically higher than banks loans, and P2P lending is only available to borrowers in certain states due to regulatory restrictions. When considering this option, you should make sure you understand all the terms and costs related to these loans before signing the dotted line.