By Natalie Bartel
Funding a small business, a new startup can be challenging without the proper planning and financial knowledge.
Microloans are a useful financial tool business owners can employ as a banking solution. Typically ranging from $500 to $50,000, microloans are smaller, and often come with business coaching or technical assistance, making them a great choice for new business owners. Microloans are usually collateral-free as well — specifically designed for those who cannot be easily approved by traditional banks.
“Microloans can be a vital tool in accessing capital for small businesses and they are often the first rung on the ladder of borrowing,” says Amy Narr, a business consultant at the Small Business Development Center (SBDC) of UW-Milwaukee. “Some borrowers might not qualify for a traditional loan on paper, yet can prove their creditworthiness and build a strong financial track record by making on-time repayments on a microloan.”
Larger banks generally have multiple loan worthiness, credit score and financial history requirements that some entrepreneurs may not yet have established. Microloans, on the other hand, are more mission-based.
“The disparity in race, education and economic opportunity, historically and present day in our country, creates an unequal system for many, and banking has always been a big lever in this unjust model. Traditional underwriting often favors qualification standards easily attainable by those already positioned within the system, while minority communities must work twice as hard for the same access,” explains Narr.
Instead of seeking out a small loan from a traditional bank, small business owners can find microloans through chambers of commerce, municipalities or Community Development Financial Institutions (CDFIs). According to Narr, CDFIs are specialized, mission-driven private financial organizations certified by the U.S. Department of the Treasury’s CDFI Fund. These lenders consider the social capital of an individual in addition to their financial situation.
“It’s more, ‘Let’s look at your character and your track record [and] the business idea,’” says Narr. “They’re specifically designed to bring capital to underserved communities. They kind of fill that gap between no access and bankable.”
The Wisconsin Women’s Business Initiative Corporation (WWBIC) works with small businesses and entrepreneurs to provide educational workshops and webinars. WWBIC can also assist with lender matching, and help business owners with proposals, projections and business strategy.
The nonprofit has two options for entrepreneurs to access funding as well. As a CDFI, WWBIC offers capital loans from $1,000 up to $350,000 to startups and existing businesses.
It also houses an interest-free, no-collateral crowdfunding business loan program through Kiva.
Jazmynn Appleton, Kiva and alternative lending manager at WWBIC, recommends Kiva as a starting point for new business owners. Kiva is a global nonprofit crowdfunding platform that provides zero-interest loans from $1,000 up to $15,000. Appleton says Kiva is a great way for groups without substantial credit to apply for loans, educate themselves and bring awareness to their business.
“As far as WWBIC goes, about 60 to 65% of the borrowers are women,” says Appleton. “That’s our main focus: women, people of color, people with disabilities and veterans.”
Appleton says the end goal for business owners utilizing a Kiva loan is that they build up their credibility and transition to a larger, traditional bank. Overall, Narr says it’s always best to avoid debt and begin financing a business idea with one’s own money if possible, but microloans are a safe and worthwhile banking solution.
“Microloans are a great place to start, but you’re going to need to put in some of your own money, and your own blood, sweat and tears,” Narr says.
“Starting a business takes a lot of work and perseverance — and the loan is just a piece of it.”
