Understanding the Basics: Microloans vs. Traditional Loans

Understanding the Basics: Microloans vs. Traditional Loans

Understanding the Basics: Microloans vs. Traditional Loans

Finding the right loan for your small business venture can be difficult, especially when considering the variety of financing options that are out there. A source of funding to consider for smaller loan amounts up to $35,000 is a nonprofit microlender. These community-based lenders differ from traditional lenders (banks) in three key areas:

1. Flexibility

Microlenders are community-based organizations that often provide business support services in addition to loans. Because their first priority is supporting the community, nonprofit microlenders typically offer more flexibility than traditional lenders. Microlenders are often more forgiving in terms of minimum credit score and will look at alternate forms of collateral. They are also able to customize loan terms so that your monthly payments are comfortable. Microlenders look at the broader aspects of your business, rather than just your credit score.

This flexibility means that microlenders are often able to lend to businesses in industries that may not normally meet the qualifications of traditional lenders. For example, loans to restaurants are generally made by microlenders, whereas traditional lenders are more typically wary of lending to these small business owners.

Here at Accion, we were able to provide a microloan to a restaurant owner with a lower credit score because they demonstrated great cash flow. While traditional lenders may have turned down this same restaurant’s loan application, Accion saw the business’ potential and promise, and issued them a small business loan.

2. Value-Added Services

Microlenders do not just serve as a source of capital, but they also provide access to valuable services for small business owners. Value-added services among microlenders vary — spanning from workshops, to helping you perfect your business plan, to one-on-one coaching. Loan officers will help you understand your credit, and will help you get your finances in order so that they can put together an individualized loan package for you.

For many borrowers, a microlender can act as a business mentor and offer sound, personalized advice about your business venture.

3. Financial Terms

Microloans are generally a great option for businesses needing smaller amounts of capital (up to $35,000—the average small business loan at Accion is $13,000). You can expect interest rates to be slightly higher than traditional banks; however, because microloans are issued for smaller amounts, they can be paid back faster (meaning lower overall interest for you). Microlenders are also very accommodating in their terms, and will help create a comfortable monthly payment schedule with you.

Choosing the right loan for your small business can be overwhelming—at Accion, we always recommend that small business owners take the time to understand all of their options and the pros and cons of each. Many borrowers have found microloans to be a great option because they provide flexibility, value-added services, and quicker financing.

About the Author – Gina Harman is CEO of the Accion U.S. Network, the largest nonprofit microlending network in the United States.

This article was originally written on July 15, 2014 and updated on October 20, 2020.

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