Lending Library

According to the U.S. Small Business Administration (SBA), small businesses account for 99.7% of all businesses in the U.S. But what exactly is a small business? Below, we’ll dive deeper into the SBA’s definition of a small business, so you can determine whether you meet SBA loan requirements and qualify for certain benefits.

SBA small business definition.

The SBA’s definition of a small business varies by industry and is defined either by a business’s average annual receipts or by the number of employees.

The SBA’s set size standards for every industry are sorted by the North American Industry Classification System (NAICS). A NAICS code is a six-digit code number that helps companies explain what they do. 

If you don’t know what your NAICS code is, visit Census.gov/NAICS to explore your options. In the event you can’t find a perfect match, go with the closest option. Keep in mind that your NAICS code should describe the primary activity of your business or the one that produces the most revenue.

Here’s a look at several industries and the maximum average annual receipts (your gross income plus the “cost of goods sold,” based on your federal tax returns) or number of employees (the number of workers you hire each of the pay periods for the preceding completed 12 calendar months) that qualify them as a small business. 

Only one size standard applies per industry.

In addition to maximum average annual receipts and maximum number of employees, the SBA will consider whether your company is headquartered in the U.S. and whether it primarily operates in the U.S. It will also look into whether your company is a for-profit business and whether it’s independently owned and operated.

Do you qualify as a small business?

To find out if the SBA considers your company a small business, follow these steps.

1. Visit the SBA size standards table to locate your industry and NAICS code.
2. Look at the figure under average annual receipts or number of employees.
3. Do some math or research to determine if you meet the threshold for average annual receipts or number of employees. 

You can also go to the SBA size standards tool and plug in your NAICS code. The tool will then ask for your average number of employees or average annual receipts. Based on your answer, it will verify whether you meet the SBA’s criteria for a small business.

Benefits of being a small business.

If the SBA does count your company as a small business, you might be wondering how you can take advantage of this classification. Here are some ideas. 

SBA loans

There are a number of SBA loan programs that offer low rates and longer repayment terms you might not be able to find elsewhere. The 7(a) loan is the SBA’s most popular program and offers up to $5 million in capital for small business owners. Upon approval, you can use this capital to cover a variety of expenses, such as startup expenses, real estate, short- and long-term working capital, and equipment. 

Business development programs.

The SBA has Small Business Development Centers (SBDCs) throughout the U.S. to provide small businesses with counseling, training, and technical assistance. Another organization called SCORE also offers free mentorship and resources. You can utilize these development programs if you qualify as a small business.

Government contracts. 

The SBA works partners with federal agencies to award 23% of prime government contract dollars to qualifying small businesses. If you meet the SBA definition for small business, you can submit bids and take advantage of government contracts, which offer an additional, reliable stream of income. 

Research grants

The Small Business and Innovation Research research grants are designed to encourage small business owners to dive into technology and commercialization opportunities. While this is a highly competitive program, it also offers small businesses the chance to expand your technological investment and potentially profit from commercialization.

Tax incentives

As a small business, you can also save money with tax incentives. The Small Business Health Insurance Tax Credit, for example, gives eligible small business owners the chance to save up to 50% of employee health care costs, if they buy insurance from the Small Business Health Options Program (SHOP). Some cities, like Philadelphia, also award tax credits to entrepreneurs and small business owners.

Bottom line

If you believe you’re a small business owner, there’s a good chance the SBA does, as well. But your average annual receipts and number of employees may position you as a medium sized or larger business instead. That’s why it’s wise to do some research and determine where you stand. If the SBA does consider you as a small business, go ahead and take advantage of everything you can! See if you qualify and apply for an SBA loan.

For business owners and entrepreneurs with a large amount of savings, the main obstacle to starting a business is often coming up with a viable idea. Yet many aspiring entrepreneurs have a different problem—the idea is there, but the capital isn’t.

Startup funding or startup capital is something that every new business needs to get off the ground. As an entrepreneur, however, the challenge is figuring out where to find the startup funding you need to launch your new business. On a positive note, there are many startup funding options available if you know where to look.

How do startups receive funding?

Accessing startup financing can be a struggle. Traditional banks rarely offer business loans to brand-new entrepreneurs. Before lending any funds, many lenders prefer to see a proven financial track record that demonstrates an ability to repay the funds a business loan applicant is seeking. Without that financial history, the lender does not have the foresight to predict whether your venture may be successful enough to make good on your obligation.

These challenges create quite a conundrum for would-be entrepreneurs. How do you get the capital you need to get your startup off the ground when banks are unlikely to approve you for traditional business loans? 

The good news is that there are multiple ways small business owners can find the startup funding they need. Some entrepreneurs find alternative financing options to fund their startups, some turn to investors, and others rely on self-funding to get the job done. Additionally, there are a few out-of-the-box ways to access startup capital available. One of the key ways to succeed as a new business is to find the right combination of startup funding that works for you.

Startup funding stats.

• 54% of SMB ownersstarted their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• The average loan amount for a small business owner is $47,000.*
• A small business has a median of five employees when it is first funded by an outside lender.*
• A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

Types of startup funding.

Below are 11 types of business funding that are available to startups. Read on to discover whether one or several of the following startup funding options might be a good fit for your new business. 

1. Alternative business loans

Small business loans from alternative lenders can be a solid funding resource for new startups. These loans often feature more lenient qualification standards compared with traditional business loans. As a result, alternative business loans may be a better fit for new businesses that are unable to qualify for other types of business financing. 

In addition to less stringent requirements, alternative business loans also feature other benefits such as credit-building potential and faster funding speed. And these small business loans may offer more flexibility when it comes to how you use the money you borrow as well. 

2. SBA startup loan

The Small Business Administration (SBA) is typically known for providing loans to established businesses. However, that doesn’t mean there’s no hope for an entrepreneur who’s trying to get their new business venture off the ground. 

If you are able to meet the SBA’s borrowing requirements, you may be able to qualify for an SBA loan even as a startup. Generally, these loans are available to partially-financed startups. The SBA likes to see the business owner have some “skin in the game” with around 30% of the owner’s own money in the business. The SBA also prefers to work with startups where the owner has some experience in the industry and in management.

It’s also important to note that the SBA itself does not issue loans. Rather, the agency establishes the guidelines for an approved intermediary and guarantees a percentage of the loan (in the case of default) which minimizes the risk to the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies, check out this helpful SBA loan guide.

3. Microlenders

Entrepreneurs who cannot secure startup funding from other sources may also want to consider working with microlenders. Microlenders are often non-profit organizations that offer loans to small business owners—sometimes including startups—for small amounts. The loan amounts from microlenders can vary, but frequently range from $5,000 to $50,000. 

Some microloans are available to specific categories of small business owners, such as women-owned businesses or minority-owned businesses. But other microloans may be obtainable by entrepreneurs that fit in broader categories. 

The Small Business Administration also offers a microloan through SBA funding intermediaries for up to $50,000. The SBA micro loan option does not require any collateral from the borrower and is available to eligible businesses, including startups. 

4. Business line of credit

Business lines of credit are among the most flexible ways to help fund your startup. These credit lines can provide a business owner with quick capital, which they can use to meet a variety of business needs or resolve a cash flow gap.

When you open a business line of credit, the lender gives you a credit limit which represents the maximum amount you can borrow on the account. You are not required to use any of the funds until you need them, and the lender only charges interest when you access your credit line. 

As you repay the money you borrowed, you also eliminate the interest the lender charges you. At the same time, you regain the ability to borrow against the same credit line again in the future—up to the credit limit—as long as the account remains open and in good standing (and the draw period is active on your account). 

5. Business credit card

A business credit card could be another helpful type of startup funding to consider when you open a new business. Even if your business is brand new, you might qualify for this type of account if you have a good personal credit score. 

There are many ways that a business credit card may benefit your new startup. First, a well-managed business credit card might help you build good business credit for the future, if the card issuer reports the account to one or more of the business credit reporting agencies. And a business credit card can also be valuable for helping you keep personal and business expenses separate. 

You can also use a business credit card to help you manage business cash flow. However, it’s best to pay off your full statement balance each month if possible to avoid paying expensive interest charges on the account. 

Finally, some business credit cards feature valuable rewards or cash back benefits. And while you should never spend extra money to chase rewards, there’s nothing wrong with earning extra perks on purchases that you already need to make for your business anyway. 

6. Crowdfunding

Crowdfunding is another strategy that some entrepreneurs use to generate funding for new startups. Websites like Kickstarter and Indiegogo are examples of helpful tools that can help entrepreneurs raise small amounts of money from a large number of investors. 

In addition to equity crowdfunding (as described above), some small business owners use debt crowdfunding to borrow small amounts of money from numerous lenders. Donor crowdfunding is another option to consider as it allows entrepreneurs to raise donations to support their business goals. 

When the crowdfunding process is successful, it can result in an influx of startup funding to support a small business’ goals. However, results can vary and many entrepreneurs find that crowdfunding campaigns fall short of reaching their funding needs.

7. Venture capital

You may be able to get funding from investors for your startup in the form of venture capital investments. With venture capital, you give up partial ownership in your business in exchange for investments. 

Venture capitalists take on a lot of risk. There’s a chance these investors could lose all of their money if a new business venture doesn’t succeed. As a result, most venture capitalists typically focus on working with companies that display high-growth potential. 

As mentioned, you typically need to be prepared to offer partial ownership in your company in exchange for venture capital investments. You might also have to agree to allow investors to play an active management role as well, or at least have a seat on the board of directors. By taking a more active role in the startups in which they invest, venture capitalists often aim to improve their chances of success. 

8. Startup accelerators

A startup accelerator is a small business mentoring program that has the goal of accelerating the growth of your new business venture. Typically, you must apply to be accepted into a startup accelerator, and you’ll need more than a good business idea to qualify. Many startup accelerators require startups to have an actual product (or at least a prototype) ready to produce and promote. 

If a startup accelerator program approves your application, it will typically require you to sign over a percentage of equity in your company (often 5% to 10%) to secure a spot in the training program. Should the accelerator help you find other investors, you may have to surrender additional equity to secure more startup capital in the future.  

9. Small business grants

Small business grants represent another unique and appealing way for startups to seek funding. Unlike business loans and other types of financing, you do not have to repay grants, nor does this type of funding feature the added expense of interest or fees. 

On the other hand, competition tends to be high for small business grants. Therefore, you should be prepared to conduct research and often submit numerous grant applications if you hope to use this strategy to fund your new business venture. 

Even if you apply for dozens of grants, there’s no guarantee that you’ll receive the funding you seek. But it doesn’t hurt to try as long as the process doesn’t become so time-consuming that it keeps you from completing other important tasks in your startup business journey.

10. Personal savings and credit

Many small business owners rely on personal savings or personal credit to fund their startup business ventures. The SCORE Foundation (powered by the SBA) says that 78% of startups receive capital from personal savings or income from another job. MasterCard® research also shows that 46% of small businesses use personal credit cards. 

It’s important to understand that using personal funds or credit to invest in your own startup carries significant risks. For example, some entrepreneurs might withdraw funds from savings or retirement accounts to launch a new business venture. Yet before you consider taking such a big risk, it’s important to consider what would happen if the new business failed and make sure that possibility is something you could survive. 

11. Family and friends

Some small business owners have the privilege of being able to turn to family and friends for support of their new business ventures. And whether your loved one wants to get involved as an investor, a lender, or a donor, receiving a helping hand from someone close to you can mean the world when you’re working hard to turn your business dreams into reality. 

According to NorthOne, around 10% of small business owners used funds from friends or family in 2021. Yet before you accept loans, investments, or donations from loved ones, it’s important to consider the potential hidden cost. 

Even the best-made business plans do not always succeed. If your startup fails and you’re unable to repay your loved one (or if their investment turns into a bad one), that loan or investment could become a financial loss for your friend or family member and damage important relationships. So, before you accept any startup funding from loved ones, it’s important to put all of the loan or investment terms in writing and have an honest conversation about the risks involved.

Next steps

There are many different ways to get startup capital for your business without a traditional bank loan. So take the time to review your options and figure out which ones work the best for you. If you decide to borrow money for your startup, it’s also wise to compare multiple financing options to make sure you find the best deals available for your situation. 

As a responsible business owner, it’s also important to understand how much financial assistance you need and can afford to repay. Before you apply for any financing you should have a plan in place to pay back the money you borrow without putting yourself or your new business under financial strain.

For many people, the American Dream is to take a great idea and turn it into a thriving business. Yet it’s rare that a great idea alone will convince an investor or lender to take a chance on you. Before a lender in particular will approve your application for a business loan, you typically need to prove that you and your business are good credit risks. 

Some borrowers may have trouble satisfying the qualification requirements of traditional commercial lenders—especially startups and small business owners with less-than-perfect credit. This inability to access financing could be a key factor that drove 61% of small business owners to rely on personal funds to address financial challenges in their companies in 2021 (based on a Federal Reserve report). 

If you find yourself in a similar situation where you need business capital, but traditional financing doesn’t make sense, peer-to-peer (P2P) lending could be worth considering. Here’s what you need to know about how this alternative business loan solution works. You’ll also learn whether P2P loans are safe and how to determine if they are the right fit for your small business. 

What is peer-to-peer lending?

Peer-to-peer lending is a method of borrowing money that allows you (aka the borrower) to access funds from multiple investors (aka peers), rather than a single lender or financial institution. Due to this unique borrowing structure, P2P lending is sometimes called person-to-person lending or social lending, as well.

P2P lending platforms utilize technology to bring different investors together to fund an individual loan. Some P2P platforms may even allow lenders to compete with one another to make loans—sometimes (though not always) resulting in more attractive interest rates and loan terms for borrowers than they might receive elsewhere. In other scenarios, borrowers may be able to qualify for financing that they might not otherwise have qualified to receive.

How does peer-to-peer lending work?

Peer-to-peer lending marketplaces use fintech (aka financial technology) to match would-be investors with would-be borrowers who are seeking various types of loans. It’s important to understand that P2P platforms are not lenders themselves. However, the online platform can help perform the following tasks:

• Collect and process a loan application from the prospective borrower 
• Facilitate a credit history and credit score check 
• Share your potential loan offer (including APR and fees) if you’re eligible for financing
• Move your loan to the funding stage, if you accept the offer
• Share your loan listing with investors to see if any are interested in funding it
• Service funded loans, process monthly payments, and divide payments among investors
• Contract with third-party debt collectors to collect defaulted debts

Is peer-to-peer lending safe?

The U.S. Small Business Administration (SBA) notes that peer-to-peer loans could be a practical alternative financing solution for small businesses. Yet the agency cautions that there are both benefits and drawbacks to consider before a business decides to move forward. 

As a borrower, one of the first details you should understand about a P2P loan is the cost. In addition to the interest that the investors charge on your business loan, the P2P platform may charge supplemental fees. (Investors may pay fees to the P2P platform, as well.) Of course, any type of financing comes at a cost, but it’s always wise to do the math, so you know what you’re agreeing to pay for a business loan up front. 

For investors, it’s important to know that P2P investments are not FDIC-insured. Therefore, you may face an added degree of risk with this type of investment compared with other options. At the same time, if the process goes smoothly, you might enjoy higher returns than you’d receive from FDIC-insured CDs or savings accounts. It’s up to you to determine your risk tolerance and how much of your portfolio you’re comfortable exposing to higher-risk investments.

Is a peer-to-peer loan right for you?

If you’re wondering whether a peer-to-peer loan could work for your business, there are a few details you’ll want to consider. First, it’s wise to review your credit reports and scores (from all three credit bureaus, if possible). 

A lender will likely review one of your consumer credit reports and scores when you apply for a P2P loan. Therefore, it’s helpful to know the condition of your credit before you apply for financing. You can access a free credit report from Equifax, TransUnion, and Experian via AnnualCreditReport.com once every 12 months. Through the end of 2023, you can take advantage of free weekly credit report access through the same website. 

Next, make sure you’re in a position to afford a new business loan. If you believe your company might struggle to afford a new monthly loan payment, now may not be the time to seek new financing. 

Finally, shop around and compare P2P loan offers from multiple companies. You may also want to consider other types of small business loans. Comparing different financing offers can help you make sure you find the best deal available for your company. 

Debt financing has long been a preferred financing option for small business owners. It’s true that the majority of entrepreneurs leverage their own money to start or run their business, but those funds often fall short of the ultimate need. In these cases, a business loan gives you more control than you’d get with other routes such as angel investors or borrowing from family members.

However, lenders reject the majority of business loan applications. Rather than letting this reality deter you, it should merely encourage you to put your best foot forward whenever submitting an application. There’s no shame in getting denied by a lender. It happens to everyone. What matters is that you try your hardest and put your business in the best position to succeed.

Here’s a closer look at common reasons loan applications are rejected. Some are easily remedied, while others take more effort. The important thing to note is that none of these factors is a death sentence. If you find that one of them contributed to a rejection, simply make a goal to improve it for your next application. With this focus on incremental improvement, anything is possible.

Here are some of the most likely reasons an application gets axed:

You Botched the Application

One of the biggest contributors to loan rejections is also among the most basic: the applicant didn’t handle the process correctly. This includes leaving sections of the application unfinished, entering incorrect information, or failing to include the required documentation.

You can reduce the risk of this fate by preparing your documents ahead of time. You’ll find it’s much easier to write a business plan or locate your tax returns when you don’t do it the night before the deadline.

Put yourself in a lender’s shoes and it’s understandable why they’re sticklers for details. Because lenders make informed decisions based on the contents of your application, forgetting to complete a section, including erroneous information, or neglecting to send the required documents makes their decision much easier. If you can’t be trusted to fill out an application correctly, how can you be trusted with a large sum of money?

Imagine if a friend asked you to borrow money but had no clear idea what they would be spending it on. That kind of disorganization would probably be met with a polite rejection from you. Most people only loan money to a friend if they trust them and have an idea of where the money is going.

Your Credit Score is Lacking

Credit scores result from an algorithm that lenders use to predict how likely you are to repay the money they might provide to you. The determinants of your score come down to relevant factors such as how promptly you pay your recurring bills and how much of your credit card balance you pay off each month.

Business owners have 2 types of credit to watch: personal and business. That’s right—your business has its very own credit report and credit score from Equifax, Experian, and Dun & Bradstreet, the 3 major business credit bureaus.

A low credit score can stem from a history of late payments, unpaid tax liens and judgments, or high use of available credit. But lenders can also ding you for not having established a long enough credit history.

Just because your score isn’t where it needs to be for one loan doesn’t mean you’re out of luck. Each lender has their own standards and they generally aren’t shy about broadcasting them. So when you see credit score requirements associated with a loan, take them seriously. You’ll save yourself a lot of time by not chasing loans you aren’t qualified to receive.

You can turn around a low score by paying down debt, paying your bills on time, and keeping your account balances low. If insufficient business credit is the issue, Credit Karma recommends taking the following actions to establish a credit history:

• Apply for and use a business credit card.
• Open a business bank account under your business name.
• Get a business phone under your business name.
• Apply for an employer identification number (EIN) from the IRS.
• Register your business with Dun & Bradstreet to get a free DUNS Number.

Taking these steps—and being consistent—can help you improve your business credit score so you can qualify for financing, maybe even at a better rate.

Your Business is Too Green

Every business needs to start somewhere, and there’s no shame in being a young company. It’s actually something to be proud of because it takes determination to turn your idea into a reality.

But many lenders will be understandably skittish when dealing with businesses that lack a track record. The success rates of a company over two years old are much higher and your banker, by his or her very nature, is highly risk-averse. They usually won’t take a risk on a very young company. You should also know that they will likely use your company tax returns to determine how long you’ve been in business. With that in mind, even if you don’t have much to report, file your returns starting with the first year to establish your company’s age right from the start. Your ability to repay your debt is substantially impacted by the amount of money your business brings in, so the more evidence of cash flow you can provide, the better. And for young businesses, this type of evidence is in short supply.

You Need More Collateral

Many small business loans are secured loans, meaning you need to offer something of value to protect the lender in case you aren’t able to make the necessary payments. Assets used for collateral include vehicles, homes, properties, equipment, and retained income.

Lenders prefer borrowers who have skin in the game—assets offered up as collateral, which the borrower would forfeit if they defaulted on their loan. Before you reapply for financing, document all of your personal and business assets, such as equipment, bank accounts, real estate, vehicles, and even accounts receivable, and then decide which you’d be willing to use to secure a loan. As you work through the list, consider your likelihood to default and what the consequences would be if you had to forfeit the assets.

When you lack an adequate asset to use as collateral, you’ll find that lenders are more likely to turn down your applications. While this can be frustrating for borrowers, it makes sense. If lenders always handed out money without guarantees, it wouldn’t be long before they’d run out of it.

Your Cash Flow is Lacking

When lenders want to quickly assess an applicant, they often start with cash flow. Not only does it show the strength of your business performance, but it provides a glimpse into your ability to manage details and stay on top of expenses.

If your business is new, it often lacks the track record needed to instill confidence. The good news is that certain loan options are ideal for newer businesses. Just make sure your business tenure lines up with the requirements for a specific loan before you apply. Some businesses experience seasonal slumps, which is understandable to lenders. What they’ll want to see is that you can balance your financial obligations year-round. Accounting software makes this easier to accomplish by tracking invoices so you can collect payments promptly. Also, this type of software can quickly create cash flow reports for loan applications.

You Went for the Wrong Loan

There are times when a borrower has all their ducks in a row, yet they’ve simply applied for a loan that isn’t a good match for their business. Perhaps your business doesn’t qualify due to its size or structure, or your business plan calls for using the money in ways the lender doesn’t approve.

The point is that your due diligence needs to take into account the nuances of each lender so you don’t waste time applying for a loan that will never be possible for your business.

Banks look at your debt-service ratio to determine whether you’ve got enough cash flow to make the loan payments. To calculate the ratio, take your annual net operating income and divide it by your annual debt payments. Higher numbers are better. You’ll need at least 1.15 for a Small Business Administration (SBA) loan guarantee, and lenders could require a stronger ratio. Next time you apply, run your anticipated loan amount through an online loan calculator to make sure you’re not overreaching.

At the other end, it’s just as much work for lenders to extend a large loan as a small one, but they make more money on the large one. If you’re finding yourself feeling pressured to apply for more than you need just to qualify, consider alternative sources of financing, such as crowdfunding, angel investors, or an SBA microloan.

Your Business Plan is Underwhelming

Many lenders ask for business plans as part of the application process. They’ll review your plan to see how you intend to spend their money, as well as to gauge your organizational and strategic abilities.

Writing a business plan speaks volumes about whether your company is a good investment, and it’s one of the primary tools lenders use to evaluate business loan applications. If yours wasn’t up to snuff the last time you applied for a loan, take the time now to whip it into shape. In addition to descriptions of your company and its structure, your product or service, and your sales and marketing plan, the SBA recommends that you present the following:

• A market analysis
• Financial projections based on your income and cash flow statements, balance sheets, and budgets
• An appendix with documentation supporting your application

Applying for a business loan is never easy, but it’s preferable to letting cash-flow issues keep your company from growing. By shoring up your credit, keeping your requested loan amount realistic, and wowing lenders with a business plan that shows you and your company in the best light, you’ll maximize your chances of getting the funding you need to take your business to the next level. 

Never rush this stage of the application. Your business plan is your sales pitch, as well as your guiding light. If done correctly, it will sufficiently impress the lender so that you can obtain the financing you require. Once you have the money, it will then serve as your blueprint for spending it in the most effective way possible.

Your Financial Statement are Lacking

Not having accurate, informative, timely, accessible, and comparative financial data will hurt your chances if you need to raise money and get a business loan, underscoring just one of the reasons to make sure this part of your business is handled professionally. Here are the most common errors and pitfalls that will hinder your business from raising funds:

Revenue Recognition

Actually “earning” your revenue is almost never directly correlated to when you send an invoice to or receive money from your customers. Each industry has one right and many wrong ways to recognize revenue, and bankers and sophisticated investors will be familiar with each. If you are a software company and the banker does not see that you have an account called “Deferred Revenue” on your balance sheet, for example, they will lose confidence in your ability to run your business.

Gross Margin

There are two main expenses in a business, and they should be separated on your profit and loss statement. Specifically, all expenses directly related to the manufacturing of your products or the fulfillment of your services, also referred to as costs of goods sold or cost of sales, should be subtracted from your net revenue (correctly recognized as mentioned above) to determine your gross profit. Then divide your gross profit into your net revenue to find your gross margin. Many businesses fail to show this separate from the rest of their expenses and net profit before taxes, but it is a number bankers and investors want, and need, to know.

Balance Sheet Reconciliations

Every single account on your balance sheet should be reconciled every month, not just your bank and credit card accounts. This includes a thorough review of your accounts receivable, inventory, accounts payable, payroll liabilities, inter-company loans, and more. You need to be able to explain to a banker or investor what each account represents and even be able to provide documentation, upon their request, to validate the balance reflected on your balance sheet. Too many businesses pay little or no heed to their balance sheet, but investors and bankers know it drives the accuracy of everything you present in your financial statements.

Lack of Metric and Ratio Knowledge

You need to know your numbers, and, even more importantly, you need to know what they mean in the context of your past, future, and industry as well as the perspective of bankers and investors. Bankers care about current ratio, days sales outstanding, working capital days, inventory turnover, fixed charge coverage ratio, and other proofs of your liquidity, stability, sustainability, and wherewithal to pay them back. Investors care about EBITDA, free cash flow, burn rate, and other things dealing with the cash required to grow the business and the potential return their investment may garner.

Your Debt Utilization Raises Red Flags

Lenders will pay close attention to the credit currently available to your small business. If you’re using too much, it could mean you are already stretched thin and might not be able to handle your repayments consistently.

On the flip side, if you haven’t utilized credit in the past, you could be considered a risk because you won’t have a debt track record from which they can base their decision. If you have a healthy amount of credit available and are only using a moderate amount, that puts you in the safety zone. It shows you have responsibly borrowed money in the past and know how to handle the repayments.

You Don't Have Any Income

Unlike an equity investor who will reap the rewards of their investment when a business is either sold or goes public, the first loan payment will likely be due somewhere around 30 days after a business owner receives the proceeds. In other words, if there isn’t sufficient income to make the loan payments, it’s unlikely the lender will approve the loan.

Your Loan Isn't Cost-Effective for the Lender

Don’t forget that it costs money to lend money. So if you apply for a small loan from a larger lender, they might see it as more effort than it’s worth. There are plenty of financing options for small dollar amounts, but you need to make sure you’re approaching the right lenders.

The Best Way to Begin Your Loan Search

Many of the mistakes listed above involve carelessness on the borrower’s part. They didn’t research the lender well enough or they didn’t carefully prepare their application. So pump the brakes a bit and take the time to understand your financial needs and identify the exact amount of money you’ll need to borrow.

According to the SBA, the median small business loan in America is $140,000. And the majority of loans are for less than $250,000. These numbers don’t necessarily mean you should follow the trend and ask for $140,000, but it provides a helpful baseline as you decide on the best amount for your needs. Use our SBA loan calculator to estimate your monthly payment and how large of a loan you can afford.

Another crucial factor is when the funds will be in your account. If you need the money right away, you’ll need to look at a small selection of expedited loans. If you have a more generous timeline, you can probably seek out slower options such as SBA loans (which can take up to 3 months to fund).

How to Recover from a Rejected Loan Application

First of all, don’t get discouraged. Only about 1 in 10 applications for small business loans are approved. It’s incredible (in a bad way) that 9 out of 10 business loan applications are rejected.

Having your loan application rejected is a wake-up call that your credit or business health isn’t as strong as you thought (or hoped) it was. It can be a very demoralizing experience—especially if you were counting on that financing to sustain your business operations.

When a loan application is denied, it can usually be traced back to two explanations: bad credit or a high debt-to-income ratio. Fortunately, both of those things can be fixed with responsible practices and a little patience, making you more likely to get a “yes” the next time. Here are 6 things to do as soon as your loan application is denied.

1. Study your rejection letter

All lenders are required by law to send you a written notice confirming whether your application was accepted or rejected, as well as the reasons why you were turned down for the loan. According to the FTC:

“The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days. An acceptable reason might be: ‘your income was too low’ or ‘you haven’t been employed long enough.’ An unacceptable reason might be ‘you didn’t meet our minimum standards.’ That information isn’t specific enough.”

Understanding the “why” of your rejection helps you know where to focus your efforts, whether that means paying down your existing debt or building more credit history. So, instead of balling up the letter and tossing it into the trash, turn your rejection letter into your new plan of action so that you can be more credit-worthy down the road.

2. Address any blind spots on your credit report

Ideally, you should check your credit report three times a year, looking for old accounts that should be closed or inaccuracies which could suggest identity theft. But with so much on your plate as a business owner, keeping up with your credit can sometimes fall by the wayside.

That becomes a real problem when your loan is rejected for reasons that take you by surprise. Credit reports don’t just summarize your active credit accounts and payment history; they also collect public record information like bankruptcy filings, foreclosures, tax liens, and financial judgments. If any of those things are misrepresented on your credit report, it can be tremendously damaging to your chances of securing credit.

Whether inaccuracies occur due to malicious act or accident, it’s ultimately up to you to stay on top of your own credit. Access your credit report for free on AnnualCreditReport.com, and file a dispute with the relevant credit bureau (either Experian, Equifax and TransUnion) if you see anything shady on the report they provide. As credit.com advises:

“If you see any accounts you don’t recognize or late payments you think were on time, highlight them. You’ll need to dispute each of those separately with the credit bureau who issued that report. Even if the same error appears on all three of your credit reports, you’ll need to file three separate disputes over the item.”

3. Pay down outstanding balances

One of the most common reasons for loan rejection is credit utilization—the ratio of your current credit balances to credit limits. This is slightly different than your debt-to-income ratio, which divides your monthly debt obligations by your monthly gross income. Both measurements reflect how much additional debt you can afford to take on, so the lower these ratios are, the better chance you have of being approved for a loan.

Being denied a loan due to your credit utilization or debt-to-income ratio means that lenders aren’t fully confident that you’ll be able to make your minimum payments. There’s nothing to do here except take your medicine: put your new financing plans on hold and focus on paying down your balances until your debt-to-income ratio is below 36.

4. Beware of desperate measures

If you applied for a loan to stave off financial hardship, being turned down can create panic that can lead to some very bad choices. Predatory lenders make their living on that kind of panic, and their risky, high-interest loans almost always leave you worse off than before.

Predatory lenders offer financing that is intentionally difficult to repay. Through their extremely high interest rates, unreasonable terms, and deceptive practices, these lenders force desperate borrowers into a “debt cycle,” in which borrowers are trapped in a loan due to ongoing late fees and penalties. Two of the most common predatory loans are:

Payday loans: These are short-term loans with interest rates typically starting at 390%. (No, that’s not a typo.) A borrower provides the lender with a post-dated check for the amount of the loan plus interest and fees, and the lender cashes the check on that date. If the borrower doesn’t have enough money to repay, additional fees and interest are added to the debt.

Title loans: The borrower provides the title to their vehicle in exchange for a cash loan for a fraction of what the vehicle is worth. If the borrower is unable to repay, the lender takes ownership of the vehicle and sells it.

Please don’t go this route. If your loan rejection has left you desperate for money, swallow your pride and try to borrow from friends and family instead.

5. For thin credit, start small

Being turned down for an “insufficient credit file” doesn’t mean you’re irresponsible—it simply means you don’t have a long enough history of credit maintenance and payments for a lender to make a confident decision about your creditworthiness.

While this situation is very rare for established business owners (who generally have years of credit card and vendor account payments under their belts), young entrepreneurs might not have a long enough credit history to secure the financing they need. If that’s the case, you’ll have to go through the motions for a while: Opening a couple of small credit accounts with easy-to-manage payments will prove to lenders that you have your finances under control.

The Consumer Financial Protection Bureau recommends two low-risk options to build up your credit file: Secured credit cards, in which you put down a cash deposit and the bank provides you with a credit line matching that amount, and credit builder loans, in which a financial institution deposits a small amount of money into a locked savings amount, and you make small payments until you come to the end of the loan term and receive the accumulated money.

6. Wait for the right moment

When you authorize a financial institution to check your credit for a loan application, it typically creates a “hard inquiry” (or “hard pull”) that stays on your credit report for two years. This is different from a “soft inquiry,” which is more commonly used in background checks and pre-qualification decisions, and has no impact on your credit. (Some alternative lenders only use soft inquiries during your application and funding process, so it’s important to find out up front if your lender will be performing a hard credit pull, a soft pull, or both.)

Each hard inquiry won’t affect your credit score much on its own, but multiple hard inquiries in a short period of time can be a major red flag for lenders, who may interpret those inquiries as a sign of financial instability or desperation.

When you’re turned down for a loan, your first instinct might be to immediately apply for a loan elsewhere, in order to get a “second opinion.” The problem is, you may be even less likely to be approved for that next application because you’re racking up hard inquiries on your credit report.

Our advice? Don’t apply for another loan until you’ve made significant improvements to your credit and financial health—a process that can take a year or more. The longer you can wait, the better.

Where to Go When the Bank Says No to a Small Business Loan

After you’ve improved your credit and financial health, you’ll be ready to look for financing options again. When looking for a small business loan, whether for expansion, short-term expenses, or any other, you have more options than just checking with your local bank. Banks and other conventional loan providers have certain criteria when approving your loan. They take into consideration many factors such as the time for which you have been in operation, credit scores, the monthly revenue you earn, your business plan, and the collateral you can provide, among others. If you’re unable to meet their conditions, they may not offer you the finance you need. In such a situation, your best bet is to look to alternative or innovative lending institutions such as Lendio to obtain the funds. Here are some of the best options out there.

SBA or Small Business Administration Loan Programs

The SBA has several small business loan programs for small enterprises, intended to meet their finance requirements. While the government does not lend directly to the companies, it works with microloan providers, banks, and other community development institutions. It supports entrepreneurs by laying down certain regulations for the lending procedures.

• SBA 7(a) Loan Program: A very versatile program, it allows start-ups and small businesses to use these funds for buying machinery, tools, furniture, and other equipment, working finances, buying and renovating fixed assets like structures and other property, among others.
• Real Estate and Equipment Loans: You can use the financing provided under this program only for expansion purposes and to buy land, existing structures, developing, renovating, and constructing buildings, and machinery for use on a long-term basis.
• Microloan Program: By way of this program, small business owners cannot buy fixed assets or pay off loans. They can only use the funds as working capital or to purchase small machinery, tools, and other fixtures. You can also buy inventory, furniture, and other supplies you need.
• Disaster Loans: If you’ve lost property and real estate, inventory, machinery, equipment, or any other supplies in a declared disaster, you can use the business loans provided under this program to replace them. This program offers finance at low interest rates.

Alternative Finance Sources

Aside from banks and the SBA, there are many other sources for getting the funding you need. Look around for the many lending institutions that offer you a small business loan without the strict criteria that banks have. They may be open to providing you business loans despite low credit scores, lack of collateral, or insufficient monthly revenues. However, you might have to pay much higher rates of interest and typically, small business loan terms are shorter than those offered by the SBA. Here are some of them:

• Lending Club: You can borrow funds of up to $35,000 from the other members if you have a credit score of a minimum of 650. Other members lend you the finance you need and can earn up to 9% in interest.
• Prosper: The maximum loan amount offered is $25,000 and borrowers with credit scores of a minimum of 640 can access funds. Lenders can provide loans in smaller denominations until the total amount is raised.
• OnDeck Capital: You can access funds from this source if you can prove that you have been in business for a minimum period of a year and have an annual revenue of $100,000. Apply for the business credit you need over the phone or by filling an application form online. OnDeck makes the loan amount available to you within a day or more.
• Communities At Work Fund: if you can meet their criteria and run a non-profit undertaking, this finance institution extends the funding you need. They direct their support to businesses with low-income and communities in the lower wealth category.
• Accion: Depending on certain conditions, you can get financing of a maximum of $50,000 if you have a credit score of at least 525. At the same time, you must prove that in the last one year, you have not declared bankruptcy and have enough monthly earnings to clear your bills and make payments towards your loan.

Crowdfunding Loans

Crowdfunding loans are similar to microloans, and small business owners that cannot access bank finance can make use of them. However, like microloans, you won’t need to pay back the loan amount in cash. Instead, you’ll need to honor the loan obligation in other ways.

• Kickstarter: This institution issues loan products to companies or creative entrepreneurs for expansion purposes. While you’ll remain the owner of the products you create, you’ll need to prove that your enterprise has the total funding to get started. In lieu of the loan amount, you’ll pay in the form of a product or service your company offers. For instance, if you’re planning to open an art academy, you might have to submit saleable art to pay for the loan.
• Indiegogo: The terms and conditions for accessing this funding are similar to that of Kickstarter. However, you don’t need to have the complete start-up finance in hand to qualify for the business credit.

Entrepreneurs and owners of startup companies no longer need to rely on banks to get the business loans they need. Nor do they need to wait for long processing times and submit elaborate paperwork to get approved. Instead, they can contact many other lending institutions and get the small business loan products they need at terms and conditions that are more suitable for their enterprise and its unique needs.

Lendio is a free marketplace for small business loans. Simply answer a few questions about your business and the amount of capital you are seeking. Lendio will instantly match you with loan options from our network of over 50 lenders. Lendio makes it possible to shop for the best business loan options and rates available without having to submit your information to multiple banks and organizations.

With all of these strategies, it’s helpful to put yourself in the lender’s shoes. Their job is to simultaneously fund small businesses and also safeguard their money. It’s a difficult balancing act, and they likely take no pleasure in rejecting applications. You can make things easier for both them and you by carefully preparing each application and ensuring that you’re giving them ample reasons to give you the green light.

If your loan is approved, throw a little party with your friends. If your application is denied, don’t despair. Remember, the majority of loans are met with a hard no. Take positives from the experience by learning from your mistakes and submitting an even stronger application the next time around. This approach ensures you’ll always be progressing and you’ll eventually get the financing your business requires.

Funding is a key part of starting a small business. After securing a loan, you can find an office space, open a storefront, order inventory, launch an e-commerce website, and pay for the services needed to get your small business off the ground. 

Starting and growing your new business doesn’t necessarily mean draining your personal bank account. Instead, look for funding opportunities to supplement your financial needs.

The cost to start and run a successful company varies greatly depending on the business model, industry, location, and the owner’s goals. According to the Small Business Administration (SBA), most microbusinesses with 1–2 employees only need $3,000 to start. Most home-based businesses are launched with just $2,000. 

Obviously, the funding needed to launch a franchise or an innovative tech startup could stretch into the hundreds of thousands, but a lot of small businesses only need a little extra capital to get their business running.

Small business owners looking for funding solutions to cover startup expenses should consider microloans. While smaller in nature, microloans can provide entrepreneurs—especially minority entrepreneurs or those in low-income communities—access to the capital needed to launch their business.

This guide takes a deep dive into microloans and answers frequently asked questions while assessing the value of this financing option. Keep reading to determine if microloans are the right funding solution for your business.

What is a microloan?

A microloan is a smaller loan with fewer stipulations issued to business owners, typically disadvantaged entrepreneurs. A business can use a microloan for a variety of purposes but will have to pay it back faster than traditional loans. 

Microloans typically cover smaller loan amounts with flexible requirements and terms. There’s no set amount for what constitutes a microloan, but according to the SBA, a microloan is any loan amount falling below $50,000. The average microloan amount is around $13,000. However, some organizations issue microloans for a little as $500—especially if they want to support community businesses or help entrepreneurs struggling to secure other funding. 

While microloans are usually available to anyone, some financial institutions will limit applicants to certain demographics. More organizations are specifically developing microloan programs to help disadvantaged business owners access the funds they need but have been unable to receive through traditional financing.

Microloans were built to help disadvantaged business owners.

The modern microloan has its roots in 1970s Bangladesh, where economics professor Mohammed Yunus loaned $27 to local women who wove bamboo stools. Yunus saw how these women were exploited by money lenders and decided to offer a better alternative. 

With his loan, these women were able to buy their own materials and begin selling their stools in their own shops. This small loan helped them launch their businesses, and they were able to quickly turn a profit even as they paid back their loans—helping to break the cycle of poverty and debt.

Yunus went on to start the Grameen Bank Project, which strived to provide funding to poor and disadvantaged business owners. Yunus and his bank were awarded the Nobel Peace Prize in 2006. 

In the modern era, several organizations provide similar services through microloans. In the United States, the SBA offers microloans to qualifying businesses to help them establish themselves and grow. 

Local governments offer small business microloans to foster job growth. Even private organizations have microloan arms that are meant to support lower-income and disadvantaged people. By giving these entrepreneurs the support they need, these microlenders can have a significant impact on communities with minimal capital risks.  

Of course, there are plenty of microloan funding options for business owners who don’t come from disadvantaged communities. However, microloans are rooted in creating opportunities for people with poor credit and limited resources. As many minority small business owners experienced during COVID-relief funding, financing isn’t always equal. Programs like microloans can balance the scales and give disadvantaged business owners access to additional funding.

What's a microloan used for?

Most microloans aren’t limited to a certain type of purchase and can be a flexible way to access the funds you need to open and run your new business. Along with providing a boost to startups, more established businesses apply for microloans when they need to rebuild after a natural disaster or when they want to expand their current operations. Companies of all sizes, shapes, and industries can use the capital from microloans to cover short-term business expenses.

A few examples of common ways small business owners might use microloans include:

• Working capital: this refers to the liquid cash you have on hand to coer daily costs. Working capital can pay for miscellaneous expenses and protect your business if you go over budget for any reason.
• Inventory: a crucial part of many small businesses, from e-commerce stores to local product-based companies. You can purchase items for sale or invest in materials that can be used to manufacture your products.
• Supplies: your supplies can cover everything from safety equipment to office items for your staff. You’re likely going to need to invest more in supplies at the front end of your business but will always need to consider these expenses as you grow.

• Furniture and fixtures: if you have an office or storefront, you’ll need desks, couches, lighting, and other furniture or fixtures to help improve comfort and productivity. You can use a microloan to cover these costs.
• Equipment and machinery: this includes everything from your POS systems to large-scale manufacturing equipment. Like supplies, you will invest more at the start of your business on these expenses, so securing a microloan can give you the capital needed to make these purchases before launching.
• Employee wages: microloan borrowers can use the funds to cover employee wages and salaries. This financial relief can keep your staff covered during a struggling period or while you wait for outstanding client payments.

Some organizations might set restrictions on how you can and can’t utilize microloans, so always review and discuss the requirements with your lender. For example, the SBA states that microloans can’t be used to pay existing debts or to purchase real estate. 

Other microlenders create loans to cover equipment costs or to promote hiring growth, which means you’ll need to use those funds for specific purposes. However, for the most part, you’ll have complete flexibility to use your microloan however you’d like.

What are the pros and cons of microloans?

Like any funding decision, a microloan has pros and cons that could determine whether this financing option is best for you. Just because microlending worked for another organization doesn’t mean it’s right for your needs. Consider a few of the pros and cons of microloans as you weigh this funding option. 

Some common advantages to microloans include:

• Microloans tend to have fewer requirements than traditional loans.
• They usually have lower credit score requirements, which means you’ll still qualify if you don’t have the best credit.  
• They are often approved faster than larger loans, giving you access to necessary funds quickly. 
• They are easier to pay off, which means your business can become debt-free faster. 
• They are less expensive. Smaller loans typically mean lower interest rates, so you owe less on the money you borrow. 
• You may not need collateral. Some microloans won’t require any collateral to prove that you’ll repay the money. 

These benefits have a significant impact on small businesses that need startup funding to open their doors or need a short-term loan to cover emergency costs. However, there are some drawbacks to opting for a microloan. 

Some common disadvantages to microloans include:

• The amount is limited. Microloans are inherently small, which means you may not have access to the full amount needed to make a significant difference in your business.
• The term might be shorter, which means you will need to pay back your loan faster and could have a higher monthly payment than a traditional loan. 
• Some microloans have restrictions on what you can spend the money on—like equipment financing or building remodeling. 
• You may not qualify if you don’t meet certain demographic requirements. Some microlenders support specific demographics (like women-owned businesses), disqualifying entrepreneurs who do not meet those requirements.

As you start to research microlending, consider what amount you’d need to borrow, how you plan to pay it off, and the timeline needed to return the amount borrowed. Answering these questions will help you to determine whether the terms of the loans you find are reasonable and to decide if a microloan is the right option. 

Who issues microloans?

There are several organizations that specialize in providing microloans to small businesses. The SBA is one of the most common sources of microloans, so we’ll start there.

SBA microloan program

The SBA is a popular funding resource for small businesses, and they also facilitate microloans throughout the country. You won’t deal directly with the SBA to apply for and receive these microloans.

Instead, the SBA partners with intermediary lenders—nonprofit community-based organizations with lending and management experience—to review, approve, and distribute microloans to borrowers.

Small businesses looking to secure a microloan from the SBA’s microloan program should know the following details:

• Borrowers will need to contact their local SBA district office to begin the application process.
• Each intermediary lender has its own lending and credit requirements, which can vary.
• The maximum repayment term on an SBA microloan is 6 years.
• The maximum amount a borrower can receive is $50,000.
• Interest rates on the microloan are determined by the intermediary lender but typically fall between 8 and 13%.
• SBA microloans cannot be used to purchase real estate or pay off current debts.

Other microloan lenders

Beyond the SBA’s microloan program, you can also find microloan opportunities from private lenders or nonprofit organizations like Accion USA or Kiva.

To find a lender who can help you secure a microloan, check out the curation lender services from Lendio. You can fill out a few basic forms and compare lenders to see which ones offer the most favorable terms. To start, answer a simple question: how much money do you need? 

If you don’t want to work with a new lender, consult your bank or credit union about their small business funding options. Some banks offer discounts to existing customers, which means you could save by taking out a loan where you already have an account. However, it pays to compare rates, and you could save a significant amount of money by shopping around for loan providers.

What do you need to apply for a microloan?

Preparation is the best way to increase your odds of getting approved for a microloan and receiving your funds faster. Gathering the right information before you start the application process will streamline your approval. 

A few basic items you will likely need for the microloan application include:

• The loan amount you need and what you plan to use it for;
• Your business bank account routing information;
• Your LLC documents and IRS Employer Identification Number (EIN);
• Applicable business licenses; and
• Relevant information about your business (size, employees, annual sales, etc.).

Additionally, you’ll need to be ready for the lender to pull a business credit report and potentially a personal credit report. While you’ll be able to self-report on the application, most lenders will confirm your credit scores on their own. Microloans tend to have lower credit score requirements, but most lenders will still use your credit history to determine your eligibility and interest rates.

Keep in mind that different lenders will set different requirements for loan approval. While this list provides a basic guide for what you should gather, you may need certain documents or statements to confirm your eligibility.

If possible, review the requirements for your microloan before beginning the application process and talk to a lending specialist. They can help you to create a checklist of items to gather before you apply.

The impact of microloans on women and minorities.

Women start firms with about half the capital men do, according to a 2014 study by the National Women’s Business Council, and women-owned firms average about 6% of the outside equity that male-owned firms receive. On top of that, women receive less than 5% of conventional small business loans, even though they make up nearly 40% of all small businesses in the country.

So women are basically killing it in the economy, but they’re not alone. Minority-owned American businesses are growing at a staggering rate. In 2012, minority entrepreneurs owned over 8 million—about 29%—of businesses nationwide. This number was a huge increase over the 5.8 million owned in 2007. Yet many minorities struggle to secure funding due to lower credit scores and fewer collateral assets. The US Department of Commerce found that minority-owned businesses see loan denial rates that are 3 times the national average.

Here we have 2 amazing groups of people who are struggling to find funding for their businesses. Enter microloans. Because microlenders are more interested in fostering growth than they are in making a profit, many choose to focus on bringing their resources to the groups who need them most.

According to a report released by the city of Los Angeles after they approved a new microloan bill, “It is estimated that every dollar loaned to a small business or microenterprise generates approximately $2 of economic activity. As such, the Microloan Program could generate $2,500,000 in stimulus to the Los Angeles economy over the next 5 years.”

Simply put, microloans make the small business world go ‘round.

How you can access microloans.

Because most microloans are designed to help new and struggling businesses, their requirements are much more forgiving. You don’t have to worry if your credit isn’t perfect or if your business isn’t making a million bucks a year. You don’t even have to worry if your business hasn’t been around for a year. Applying for a microloan is easy and stress-free.

SBA microloans

As mentioned earlier, the SBA is all about those microloans, with an average microloan of about $13,000. You can’t go to them directly for the loan, however—you have to go to one of their intermediary lenders. The SBA website has a list of authorized intermediary lenders participating in the SBA’s microloan program. Your results will depend on the state where you live. SBA microloans can be used for:

• Working capital
• Inventory or supplies
• Furniture or fixtures
• Machinery or equipment

Proceeds from an SBA microloan can’t be used to pay off old debts or purchase new real estate.

Repayment terms vary according to the loan amount, planned use of funds, requirements determined by the intermediary lender, and needs of the small business borrower. The max repayment term allowed by the SBA for one of their microloans is 6 years with interest rates varying depending on the intermediary lender.

SBA loans can be a great way to get a good rate on a small loan, but they aren’t the only option for your small business.

Marketplace lenders offer competitive small business loans.

That’s right, marketplace lenders like Lendio offer loans similar to microloans. Though our lenders wouldn’t technically call any of our financial products microloans, we offer loans as low as $500.

Best of all, you just have to fill out our short 15-minute application to get the process started. You’ll start by telling us the amount of money you want—anywhere from $500 to $5 million. You’re probably not looking for millions just yet, but a microloan can help you get there.

Microloans lay a foundation for your growth.

Whether you’re a startup, in a rough financial spot, or just need extra cash, any amount of money can help. $500 can purchase a new piece of software that will streamline your workflow. A couple of grand can get you a shiny new laptop to draft your new book or edit your first YouTube video.

There are certain things microloans probably can’t help you with—like covering your entire payroll, buying a new property, or hiring additional staffers.

However, microloans can become a critical financial tool for your small business.

To give you a better idea about how these funds can help you grow your business, here are 5 common ways small business owners like you use microloans.

1. Working capital

Working capital is the money a business needs to finance its day-to-day operations—like covering utility bills, getting supplies, buying inventory, and paying for an employee appreciation party.

Cash is the lifeblood of every business. Yet many businesses struggle with cash flow, which makes it hard for them to cover run-of-the-mill expenses with any sense of urgency. For example, a recent study by PricewaterhouseCoopers found that the average company takes 68 days to pay its creditors.

With a microloan on hand, you have a reserve fund to dip into to cover working capital expenses. Not only can this help you reduce debt, it can also help you avoid late fees.

2. New equipment or tools.

Often, a simple investment in new equipment can go a long way toward increasing productivity. For example, if a company is still using an old-school cash register and managing accounting by hand, it stands to benefit tremendously from moving to a more modern solution.

You can use a microloan to invest in new equipment or tools that deliver rapid ROI. For example, if you run a company where employees are spread out and working in the field, investing in a collaboration platform like Slack to streamline communication can help your entire team work more efficiently, increasing profitability.

3. Launching a new service.

Let’s say you run a local restaurant that’s been a staple of the neighborhood for some time. For years, loyal customers have been begging you to launch a food truck business so they can grab tasty treats elsewhere across town. You always liked the idea, but you just didn’t have the capital to make it all happen.

All of a sudden, a used food truck practically falls into your lap for a price that’s too good to refuse, and you’re finally ready. You just need a little bit of extra funds to finance some other food truck startup costs.

A microloan can help you here, too. With access to these funds, you can give your truck a tune-up and paint job, buy cooking items, and start your new culinary adventure.

4. Attending a conference.

One of the best ways to grow your business is by attending a relevant conference or trade show that’s specific to your industry. Not only can this help you learn new things and stay on top of the latest developments in your field, but it can also help you land new clients.

Paying for a conference, however, can be tricky. Conference tickets can be expensive, and you may also have to pay for lodging, travel, and food costs, among other incidentals.

A microloan could help here, too. Use the funds to cover your conference-related expenses. If all goes according to plan, the skills you learn and the contacts you make will more than offset this spend.

5. Marketing your business online.

In the age of mobile devices and ubiquitous connectivity, how can you expect people to find your business if you don’t have a robust web presence?

Microloans can help you pay for online marketing initiatives. For example, you might decide to invest in content marketing, pay for sponsored posts, or advertise your business on Google and social media. Microloan amounts should be enough to launch test campaigns or boost important company news.

What are some alternatives to microloans?

If you decide that microloans aren’t the best option for you, there are other funding alternatives to consider. These options can provide the same flexibility and similar funding amounts to microloans. Consider what’s available to you and whether these choices are better for your business. 

• Business credit cards. Like a personal credit card, a business credit card lets you spend money on anything you want. Your credit provider will set a limit for how much you can spend, but you can keep charging the card as long as you stay below that limit and pay it off. Credit cards have several benefits—namely their cashback rewards—but they might not be available if you have poor credit. They also might have annual fees and high interest rates that drive up their costs. 
• Crowdsourcing. Crowdsourcing is the ultimate microloan. Instead of seeking a lump sum of money from 1 person, you ask many to give you a few dollars each—like asking 200 people for $10 to raise $2,000. Websites like Kickstarter are popular for small businesses to raise funds, and you might not even have to pay the loan back. However, crowdsourcing is unpredictable, and you may not get all the funds you need if your goals aren’t met. 
• Peer-to-peer lending. P2P lending is like crowdsourcing, but it tends to occur on a larger scale. Through P2P sites, investors and entrepreneurs can donate a few thousand dollars as a loan that you’ll pay back once your business starts to grow. Like crowdsourcing, the main drawback is that you don’t know if people will want to loan money to you. You might also have to follow strict repayment terms.   
• Small business grants. Grants are like loans, except you don’t have to pay them back. Some local governments and nonprofit foundations offer microgrants to small businesses to help build up their communities. While these grants are free, they often require a complex application process because so many companies apply for them. Plus, you may need to use the grant for specific projects—like investing in clean energy or job creation.

At Lendio, we have several business funding choices for your needs. Learn more about equipment financing, merchant cash advances, and other ways to secure small and large amounts of money to start your business.

Let us help you secure a microloan.

If you only need a few thousand dollars to launch your new business venture or help cover inventory costs, then a microloan might be right for you—especially if you’re a marginalized business owner. These smaller loans are a great way to get the working capital you need without taking on a lot of the risk or financial burden that comes with larger funding options.Whether you hope to secure $500 for a short-term upgrade or need a $50,000 investment, our team at Lendio is here to help you. Use our guides to research different funding types and opportunities for small businesses. You can find a potential microlender or an alternative option to increase the cash flow of your business.

A business line of credit is a pre-agreed amount of money that you can borrow when you need it and pay back when you don’t. As such, it’s a useful and popular tool that businesses of all sizes use to overcome cash flow gaps. But funds from a line of credit can also be used to grow the business in many ways, helping business owners accomplish more, faster.

That’s because you can use the money from a line of credit any way you wish. Unlike a traditional bank loan that must be used for the specific purpose, with a line of credit you can draw funds whenever you want, use them however you want, and draw the exact amount you want. If you don’t need the money right away, don’t use it. You can repay the credit line at any point (as allowed by your credit agreement), unlike a term loan from a bank, which has a fixed monthly repayment schedule.

Benefits of a Business Line of Credit for Small Business Owners

Finding the right funding for your small business needs can be tough. There are so many options to choose from. Lines of credit (LOCs) are perhaps the best option for small business owners. Here are 10 reasons why small businesses can benefit from a line of credit over a loan.

1. You have quick access to your cash. 

Unlike a loan, a line of credit allows you to draw funds when you need it, rather than taking out one lump sum from the start. This is especially true with lines of credit that are powered online. When you’re in a pinch and you realize you need working capital, the ability to hop on a computer and initiate a loan from your available funds is priceless.

2. You pay back only what you’ve used, not the total amount approved.

Think of a line of credit similarly to a credit card: a lender gives you a line of credit, which you have access to whenever you need it. Let’s say you want to renovate your store. You estimate the total costs of being $35,000, and you’re approved for a line of credit for $40,000. However, once you begin the renovating process, you find that the costs are much lower than expected (let’s say, only $20,000). You can take out just that $20,000, and pay back the interest on that amount, not the $40,000.

3. Cover your expenses anywhere, anytime.

With a line of credit, you can cover any unexpected expenses or any upcoming expenses you know you’ll need help with. Since you are not required to initiate a loan for the entire amount you are approved for, the rest of those funds are sitting there ready for you when you need them. This benefit allows you have the comfort and flexibility that traditional bank loans don’t offer.

4. Your line of credit can be unsecured.

Unsecured loans are a lot less risky for you and your business, and your credit score really comes into play on getting an unsecured loan. With an unsecured loan, you’re at less risk should you default on your payments. Defaulting only increases your rate in an unsecured loan whereas, in a secured loan, the lender is able to seize your assets (personal, business or both) in order to receive what they’re owed.

5. Cover those in-between costs.

When is the cost is too much to throw on a credit card but not large enough to justify taking a loan out, LOCs are great for covering those in-between amounts. For example, if you need to do maintenance on your truck for your company, it can sometimes be pricey. In some instances, your credit card wouldn’t provide enough, but the cost doesn’t warrant taking out a loan. That’s where LOCs come into play. See how much the bill is and take exactly what you need.

6. Build your business’s credit.

If you’re looking to improve your business’s credit score, a line of credit can help you do so. Making your payments on-time reflects positively on your score and can help you receive a larger line of credit in the future.

7. Separate personal and business expenses.

One issue many small business owners face is keeping that divide between their personal expenses and their business expenses. With a line of credit dedicated to your business, you can smoothly create and track business expenses.

8. Help your short-term goals.

A line of credit can be used multiple times and is something you can get approved for before you need it. It doesn’t serve one specific purpose. A line of credit is great used as a short-term solution for different things such as marketing, renovations, buying inventory or even covering payroll.

9. Find lower interest rates.

Especially when you’re starting a new business, finding an affordable interest rate is crucial to all business owners. Lines of credit tend to carry lower interest rates as they aren’t interest-rate driven (unlike loans). However, these rates tend to be variable.

Ways You Can Grow Your Business With a Line of Credit

When opportunity knocks, here are just six ways you can put that money to work to take your business to new heights.

Form an Alliance with Another Business

Many freelancers or small businesses come together to work towards a common goal, without losing their individual brand identity.

Alliances are a great way to combine complementary skills and break into new markets, without the risk of doing it totally alone. Companies participating in alliances report that as much as 18% of their revenue comes from their alliances.

Start with something as simple as co-sponsoring an event or workshop together, running a marketing campaign leveraging the power of both brands and your combined skills, or working on a small sales opportunity to get a feel for how well you work together. And, remember, they don’t have to be permanent; unlike with a formal partnership, if it isn’t working, you have the option of walking away.

Having a business line of credit on hand gives you the flexibility to take these baby steps and cover costs such as legal fees (NDAs, contracts, liability protection, etc.) and co-marketing when the need arises.

Bring Fresh Thinking to Your Business

Looking to streamline your operations or breathe new life into your sales strategy? If the old way of using invoice factoring companies are not working out, you may want to consider new options. A line of credit is a great way to help you realize new opportunities with the help of a consultant.  

For example, if you have a critical selling season coming up but the same old approach is getting tired, hire a sales consultant to advise on new strategies and tactics. Or, if you’re a solopreneur looking for guidance in how to take your business to the next level, working with a career development coach can bring you fresh insights and helpful training.

Win a Government Contract

The U.S. federal government is the world’s biggest buyer of goods and services and sets aside contracts specifically for small businesses. Lucrative as it is, it takes money to win your first government contract. According to the SBA, some businesses spend between $80,000 and $130,000 to earn their first contract and two years to see any return on investment. For example, if you want to work with the Department of Defense, you must be able to invoice and receive payments electronically, which may require you to invest in new electronic systems. You’ll also need a skilled team of experts who knows how the process works. In an ideal situation, this team would include a proposals manager, contracts manager, experienced sales team and marketing support. While you’re at it, you may want to consider SBA loans to help accelerate your business.   

These investments aside, you’ll also benefit from healthy cash flow. The government doesn’t always pay on net-30 terms, so a line of credit can be a good choice to help you make the necessary investments and be able to draw on those funds quickly, even as soon as the next business day.

Get a Marketing Edge

Small business marketing spend has remained consistent over the years, hovering at around 10% of overall budget. But one trend is emerging – a strong increase in digital channel investment. At least half of small businesses plan to increase spending on social media marketing, content marketing, and online lead generation, whereas print, radio, and other traditional channels are set to see a net decrease in total marketing investment.

Getting into specifics, 75% expect to increase their Google Adwords spend and 71% will bolster their Facebook investment. With more potential clients researching everything online before making a decision about who to work with, can you afford not to make an investment in your online marketing?

But where do you start? What’s the best approach? A marketing consultant can help you pull together a strategy that works for your budget, goals, and expected revenue returns, and a business line of credit is a great way to finance your campaign because you can draw on it at each stage of your campaign, as and when the costs come in, repay it at your convenience, and replenish the credit until you need it again.

Franchise your Business

Franchising is a great vehicle for expansion because the onus is on the franchisee to invest in opening locations and perform well, while you reap a share of the profits. Once you’ve made the initial outlay it’s down to your franchisees to bear the costs of establishing new outlets.

Franchising may be a low-cost way to expand, but it’s not “no-cost”. You’ll need the help of a franchise attorney to draw up a franchise agreement, work with a franchise consultant to develop training programs and marketing materials, and protect your intellectual property, among other steps. It may also take some time to see a return in that initial investment which raises the question of financial exposure.

While there is no set cost for franchising a business, each business is different, many of the costs can be borne with a business line of credit. Since the process of setting up a franchise network takes time, you can dip into a line of credit of say $100,000 and pay it off at your convenience. A business line of credit operates similarly to a credit card, with a revolving balance, but they tend to offer lower interest rates, and there are no fixed payments.

Win a Big Contract, Without Cash Flow Woes

Opportunities like large contracts don’t come along often, but they frequently require upfront investment in equipment, supplies, and employees, which can quickly erode cash flow. A line of credit is perfect for this kind of opportunity because it gives you the flexibility to spend only what you need and have access to those funds quickly.

You always have other options for small business funding, however, if you apply for a loan, you must specify how you’ll use those funds, and it can take some time for the funds to be approved. A line of credit is more flexible. Once you start working the contract, you can pay off the line of credit to replenish it and use it again when the next need arises.

Not All Lines of Credit are Created Equal

There are literally hundreds of ways to use your business line of credit. From buying new software so you can scale your customer relationship management capabilities, to launching marketing campaigns that will take you into new markets. But not all lines of credit are created equal. Many banks and fintech companies in the U.S. rely solely on a small business owner’s personal credit score for underwriting. You may find this problematic if you’ve leveraged your credit to build a successful businesses, bruising it in the process.Instead, look for a lender that considers more factors like your total business performance, alongside your credit. Other things to look out for include the ease of the application process and approval timeline. Today, neither of these steps should take more than a few hours. If they do, don’t be shy about looking for quicker, better options.

When you review financing options for your business, you’ll likely discover that some lenders want you to sign a personal guarantee. A personal guarantee can help reduce a lender’s risk when it loans money to a business. Yet as a borrower, that same arrangement can put your personal finances in a vulnerable position. 

It’s important to understand how personal guarantees work and the risks you’re agreeing to accept before you sign on the dotted line. This small business owner’s guide to personal guarantees will show you the basic details you need to know on the topic. Once you have more information, you’ll be better equipped to make an informed decision about your business financing options.

What is a personal guarantee?

A personal guarantee is a special provision you might find in a business financing agreement like a small business loan, a business line of credit, etc. The provision states that the business owner (or owners) agree to accept personal liability for their company’s debt. 

If your business borrows money and fails to repay those funds (plus interest and fees), a personal guarantee allows the lender to go after your personal assets to recuperate its investment. So, at least in some ways, providing a personal guarantee is like agreeing to be a co-signer for your business.

Why do lenders require personal guarantees?

You won’t face personal guarantee requirements with every type of business financing. But many business lenders do ask small business owners for personal guarantees when their companies apply to borrow money. The reason lenders make such requests has to do with risk. 

Thanks to how business loans work, there’s a level of risk involved anytime a lender loans money to a borrower. There’s a chance the borrower will fail to repay the debt as promised and that the lender could lose money in the process. 

A lender can try to offset this risk and remain as profitable as possible in a few different ways. For example, lenders will review your creditworthiness when you apply for financing. If you or your business have good credit, you might find it easier to qualify for a loan. 

Another way lenders can manage risk is by asking business borrowers to provide collateral to “secure” the loan, line of credit, or business credit card they are seeking. And, of course, some lenders ask for personal guarantees to encourage business borrowers to repay their debts (and to provide additional resources for collections if they don’t).

Pros and cons of signing a personal guarantee.

There are benefits and drawbacks to signing a personal guarantee. Here are some of the pros and cons you should consider before you agree to put your name (and personal assets) on the line for your business. 

Pros

• There may be more financing options available to your business if you sign a personal guarantee—especially if you have good personal credit. 
• You might have better approval odds if you’re willing to sign a personal guarantee. 
• Signing a personal guarantee might help you lock in a better interest rate for small business financing. 
• Your business might be able to get a loan without collateral if you provide a personal guarantee. 

Cons

• You risk losing your personal savings, home, vehicles, and more if your business defaults on its debt. 
• Your personal credit score and credit history could be damaged if the business falls behind on its credit obligation—and your business credit might suffer, too.
• Even if you sell the business (or sell your interest in the business), your personal guarantee on a debt will likely carry on until the account is closed and satisfied in full. 

No one can predict the future. Should your business be unable to repay its credit obligations for any reason, you could pay the price with your personal wealth, if you agreed to sign a personal guarantee. If that risk makes you uncomfortable, you should probably search for other ways to finance your business.

Ways to avoid personal guarantees.

Many lenders ask for personal guarantees when you apply for business loans—especially if your business is still in the startup phase. But if you’re wondering how to get a business loan without signing a personal guarantee, there may be other options available to you. 

• Work on establishing good business credit. Building business credit is a process. So, the sooner you can start, the better. 
• Search for loans without personal guarantee requirements. With certain types of business loans, like SBA loans, personal guarantees are not negotiable. Yet a few lenders may be willing to loan your business money without requiring a personal guarantee in return. However, every lender is different. So, if you prefer a business financing option that you can obtain in your company’s name—instead of your own name—be sure to do your homework. 
• Supply collateral. If your business has collateral that it can pledge to secure a loan, those assets could reduce the risk involved for the lender. As a result, your company might find it easier to find secured financing options without a personal guarantee than unsecured financing. 
• Consider a blanket business lien. Another way to reduce a lender’s risk when you borrow money is to sign a blanket business lien. A blanket lien gives the lender permission to take possession of all of your company’s assets and resell them in the event of a default. Agreeing to a loan offer that includes a blanket lien is also a high-risk way to secure financing, but it’s the business—rather than the business owner—that’s absorbing most of the risk in this scenario.
• Be aware of a confession of judgment. A confession of judgment is an additional document provided as part of your loan contract package that waives the business owner’s right to a legal defense before a court and allows a lender to go after a business’s assets if the business defaults on the loan. Including this clause is illegal in some states and Lendio does not work with lenders that include one. 

It can be difficult to borrow money for your business or even establish business credit without accepting some personal liability in the process. Lenders tend to be more comfortable working with companies when business owners are willing to put some “skin in the game.” 

However, it’s not impossible to find alternative financing solutions that do not require personal guarantees, if this is the borrowing approach you prefer. 

Consider the benefits and drawbacks of accepting personal liability for business debts up front. Some business owners are comfortable with taking on personal risk in exchange for more attractive financing options. Others are not. Only you can decide whether a personal guarantee is something that you’re willing to chance for the sake of your company.

There are numerous ways to secure business capital, and debt financing is at the top of that list. With debt financing, your business borrows money from a lender—often in the form of a short term loan or business line of credit—and agrees to repay those funds plus interest in the future.  

The right business loan or line of credit can come with many benefits. Business financing might enhance your cash flow, provide you with working capital, or give your company the financial flexibility it needs to expand. 

Yet it’s also important to understand what your business will be agreeing to repay when it borrows money, and how that new debt relates to what your business already owes. Therefore, it’s wise to calculate the cost of debt before you seek new business financing.

What Is Cost of Debt?

When a lender or debt holder extends credit to a business, it’s making an investment on a future return. In other words, the lender expects to receive compensation for the risk it’s taking at some point in the future. 

Cost of debt is the term that describes how companies repay the lenders and creditors from which they borrow money. Cost of debt is the effective interest rate a company pays to creditors—also known as debt holders or lenders. 

Others may want to know your company’s cost of debt figures, because it can help them assess the risk of doing business with your company. For example, if your business is trying to attract new investments or apply for certain types of financing, investors or lenders may want to know your company’s cost of debt to assess the financial stability of your business. 

As a business owner, you may want to calculate cost of debt as well. Knowing your cost of debt can help you make sure your current business debts aren’t putting your company under too much pressure and can help you to determine whether or not it’s wise to borrow additional money for your business.

How to Calculate Cost of Debt

Before you calculate the cost of debt for your company, you will need to gather some information. Here’s what you need to get started:

• A list of the outstanding debts your business owes. 
• The APRs your business owes on each of its debts. 

You may have to estimate some of the figures above, since the debt your business carries throughout the year may fluctuate. This may be especially true if you have business lines of credit or business credit cards with revolving balances. Your overall debt figures may also experience some variations depending on whether you have fixed or variable interest rates.  

Next, it’s important to understand that there are multiple ways to calculate cost of debt. Two of the most common approaches to the cost of debt formula are to calculate the after-tax cost of debt and the pre-tax cost of debt. Below is a closer look at the cost of debt formula for each option. 

Pre-Tax Cost of Debt

To figure the pre-tax cost of debt for your business, start by adding your total interest expenses for the year. Then, divide that figure by your total number of business debts. 

Here is an example. 

Imagine your business has three debts:

• Business Loan A: $50,000 at 4% APR
• Business Loan B: $50,000 at 7% APR
• Business Loan C: $100,000 at 5% APR

In this scenario, then, your total debts would equal $200,000.

Next, assuming the loans above all have fixed interest rates, you would calculate the total annual interest expense as follows. 

• $50,000 X 4% = $2,000
• $50,000 X 7% = $3,500
• $100,000 X 5% = $5,000

Add up the three interest amounts for the debts and your total annual interest expense would equal $10,500.

Finally, you input all of the figures above into the cost of debt formula. 

In the example above, the pre-tax cost of debt—also known as the effective interest rate—that your business is paying to service all of its debts throughout the year would equal 5.25%. 

After-Tax Cost of Debt

Now let’s consider the after-tax cost of debt. The after-tax cost of debt is how much your business pays for its debts after you factor in the cost of taxes. 

Many interest charges are tax deductible for businesses. (Note: You should talk to a reputable tax advisor for advice on any specific tax-related matters.) So the after-tax cost of debt calculation is the more common figure that business owners, lenders, and would-be investors will likely want to review. 

To calculate the after-tax cost of debt, you will need to use the following formula. 

As you can see, this formula picks up where the pre-tax cost of debt formula left off. In other words, you must use the first formula to calculate the effective interest rate before determining the after-tax cost of debt. 

Below is an example of an after-tax cost of debt calculation to help you visualize how the process works. 

Building on the example above, let’s still assume that your business has an effective interest rate of 5.25%. Since tax rates vary for different businesses, for the sake of this exercise, let’s also just assume that your business is paying a 9% corporate tax rate. 

Now, let’s take a look at how the numbers align in this hypothetical after-tax cost of debt calculation. 

So, in the example above the after-tax cost of debt is 4.77%.

Why Does Cost of Debt Matter?

Choosing the right financing solutions for your company can have a meaningful impact on its bottom line. Avoiding financing can stall business growth and cause you to miss out on valuable opportunities for growth and expansion. Yet, if you overextend your business financially and its cost of debt grows too high, that can create problems of its own. Therefore, it is important to take the time to do some careful research before you seek financing and find the right balance that works for you.