Do you need access to proper funding to get your business off the ground? Small business owners can secure funding via loans from traditional financial institutions; however, microfinancing is another option that could be the right choice for your business. While the term “microfinance” might evoke images of rural women’s collectives in developing countries, microlending is a real option for small business owners throughout Michigan and has a long and storied history in the United States. Sometimes, a business just does not qualify for a traditional loan because it is too new or too small. In that case, microfinance can help you access the funding you need to continue your business operations.
What are Microloans?
Microloans are typically offered in amounts up to $50,000 and provide funding to underserved entrepreneurs, such as women, veterans, and entrepreneurs of color. They are available through certain nonprofit, community-based organizations that are experienced in lending and funded by the Small Business Administration (SBA) but can also be funded by other nonprofits, state entities, and even private for-profit companies. If you find yourself struggling to secure financing from a traditional bank, microloans may present another option that eliminates some barriers to funding while also providing training, technical assistance, and educational options.
Microloans have the potential to fill gaps in a system riddled with inequities. For instance, an estimated 14.1 percent of U.S. households were “underbanked” in 2021, which means that the household used nonbank transactions (i.e., money orders, check cashing, or international remittances) or nonbank credit (i.e., rent-to-own services, payday, pawn shop, tax refund anticipation, or auto title loans) in lieu of banking services. Using alternative financial services like these can often be expensive for its users, costing up to $40,000 each year. In Detroit, one in four residents are unbanked or underbanked. Further, black-owned businesses are two- to three-times more likely to be denied credit, even when controlling for credit worthiness, and face higher interest rates on bank loans.
Once you’ve gathered all your materials, it’s time to consider whether or not to apply. On one hand, microloans have various benefits. If you do not have a prior record of success, a microloan can open the door to expanding your business. Evidence shows that individual microloan recipients are more likely to have higher credit scores 7 to 12 months after receiving a microloan than their peers who do not receive microloans. Additionally, microloans can help your business improve its credit score because the loan provides working capital to help your business establish itself.
However, though microloans have the potential to kickstart businesses, they can also present certain barriers worth noting. For example, microloans often take longer to disburse their funds, from 60-90 days. Furthermore, the borrowing threshold of $50,000 might not be enough to start a new business.
Microloans have the potential to fill gaps in a system riddled with inequities. For instance, an estimated 14.1 percent of U.S. households were “underbanked” in 2021, which means that the household used nonbank transactions (i.e., money orders, check cashing, or international remittances) or nonbank credit (i.e., rent-to-own services, payday, pawn shop, tax refund anticipation, or auto title loans) in lieu of banking services. Using alternative financial services like these can often be expensive for its users, costing up to $40,000 each year. In Detroit, one in four residents are unbanked or underbanked. Further, black-owned businesses are two- to three-times more likely to be denied credit, even when controlling for credit worthiness, and face higher interest rates on bank loans.
Table 1. Key Elements of Microloans
|
Interest Rates |
Varies by lender, anywhere from 5% to 20% |
|---|---|
|
Loan Amount |
Up to $50,000 |
|
Repayment Terms |
Can range from 3 months - 6 years |
|
Other Requirements (Varies by Lender) |
Detailed business documentation with positive cash flow, proven ability to make payments, a “fair” or higher credit score |
Source: US Chamber of Commerce
Should You Apply for a Microloan?
In order to successfully obtain a microloan, you should be prepared to apply with a detailed list of business information on hand. Microlenders typically ask that you provide your credit score, business revenue, accounting data, and the length of time that you have been in business. Common uses for microloans include start-up costs, inventory, tenant improvements, machinery, and equipment, but they vary depending on the lender.Once you’ve gathered all your materials, it’s time to consider whether or not to apply. On one hand, microloans have various benefits. If you do not have a prior record of success, a microloan can open the door to expanding your business. Evidence shows that individual microloan recipients are more likely to have higher credit scores 7 to 12 months after receiving a microloan than their peers who do not receive microloans. Additionally, microloans can help your business improve its credit score because the loan provides working capital to help your business establish itself.
However, though microloans have the potential to kickstart businesses, they can also present certain barriers worth noting. For example, microloans often take longer to disburse their funds, from 60-90 days. Furthermore, the borrowing threshold of $50,000 might not be enough to start a new business.
Michigan’s $10 Million Microloan Fund
If you own a private, legally established and registered small business in the State of Michigan and you are planning to use your loan funds for future expenses, you may be eligible for a microloan through Michigan Woman Forward (MWF). In March of 2023, MWF announced a $10 million business microloan program supporting women, veterans and all entrepreneurs of color through the Michigan Economic Opportunity Fund. The microloans are still available to apply to today. Michigan Woman Fund is a certified community development financial institution, which was created by Public Act 119 in 2023 to increase available capital for financial products and financial services and technical assistance. The fund is intended to benefit about 400 business owners throughout its lifecycle. In the past, MWF has supported a wide variety of businesses as diverse as golf apparel, pickling, driving school, and more.MWF’s loan can be used for:
- Purchase of inventory
- Working capital
- Start-up costs
- Purchase of equipment or leasehold improvement related to the growth of the business loan subordination
- Business acquisition
- Contract financing
Who Else Provides Microloans?
MWF is one of a variety of microloan financiers in the state and throughout the country. The SBA backs many microfinance intermediaries and there are large microlending nonprofits like Grameen America and Accion. In Michigan, the Detroit Development Fund also offers its DDF Micro Loan Fund, which specifically assists businesses in the City of Detroit, Hamtramck, or Highland Park that have been in existence for at least 12 consecutive months in amounts ranging from $10,000 to $40,000. Other microfinance programs in the Detroit area include Kiva and Launch Detroit. If you decide that microfinancing is the right next step for your business, you have multiple options to choose from.
By Lindsey Bressler
September 26, 2024
One woman's microfinancing story
By Lindsey Bressler
September 26, 2024