Microlending: What You Need to Know

Microlending is a valuable option for startups and underfunded entrepreneurs who need smaller amounts of capital. Why? Because getting approved for a microloan can provide the funds needed to cover initial expenses or help kickstart business growth.

Read on to learn how microlending works. We’ll define microlending, outline its pros and cons, and help you decide whether it’s a good fit for your business. By the end, we’ll cover key questions, including:

• What is a microloan?
• What does microlending mean?
• How does microlending work?

We’ll also compare microloans vs. small business loans to help you narrow down your choices. The goal is to find a solution that fully aligns with your objectives and financial standing.

Key Takeaways

• Microlending is an alternative lending option that’s well-suited to new businesses and entrepreneurs.
• The microlending application process is less complex than that of traditional funding.
• At the outset of a new business venture, microloans can be advantageous, but as you scale up, you’ll need larger funding options.

What is Microlending?

Microlending, or “microcredit,” is an alternative lending option for entrepreneurs and business owners who may not qualify for traditional funding. Through microlending, company owners can secure microloans (loans with low cash limits).

The borrowing limit for a micro loan in Canada is typically $50,000, lower than small business loans available through traditional banks. But they’re more accessible to entrepreneurs and financially vulnerable business owners. Unlike traditional funding, microloans do not come from large banks or financial institutions. They come from an individual lender or a micro loan company; both are lenient when it comes to borrower qualification criteria.

Microlending loans can be utilized for various expenses, including but not limited to:

• Payroll
• Shop inventory
• Business supplies
• Office or building furniture
• Equipment
• Machinery
• Fixtures

How Does Microlending Work?

Knowing what to expect throughout the microlending process can improve your experience in measurable ways. Here’s a step-by-step explanation of microlending in Canada:

Application

To start the microlending process, you’ll select a microlender and submit an application for a micro-loan. Remember that the application procedure will vary from lender to lender.

Therefore, we urge you to speak with the lender before applying and ask questions to clarify any concerns. Overall, you’ll find that the application process is straightforward.

The lender will tell you which details and documents they need to evaluate your financial standing. You may have to submit:

• Personal information (name, date of birth, social insurance number (SIN), proof of address).
• Business-related information (business number (BN), proof of business ownership).
• Business plan outlining your service or product, niche-level research, operational plan, and financial projections/forecast.
• Financial documents such as past tax returns, bank statements, cash flow projections, and income statements.
• Statement of purpose disclosing how the funds will be used.

The objective here is to give the lender an accurate representation of your business’s potential and your ability to repay the loan.

Approval

After submitting your application and all required documents, the next step is simply to wait. The lender will need time to review and analyze your information to determine whether to issue an approval. The waiting period could range from a few days to a few months, depending on your lender.

While evaluating your application, the lender may contact you to request more information.

If your application is approved, the lender will notify you directly via email, mail, or another mode of communication.

Fund Disbursement

At this point, you’ll receive the funds you applied for. Some lenders offer same-day funding, and others take several business days or even weeks. The timeline varies based on where the funds come from (government programs, private donors, financial institutions, etc.).

Repayment

As with any other loan, your microloan must be repaid over time; you’ll pay the loan amount plus any accrued interest or fees. Your repayment terms will be outlined in your approval paperwork.

Pros and Cons of Microlending

Microlending is a promising financial solution for businesses throughout Canada and beyond, but it has its benefits and drawbacks.

Pros

• More relaxed qualification criteria, making micro loans more accessible than other loans. People with income restraints, a brief credit history, or non-traditional businesses often find success with these loans.
• Lower loan amounts for those who don’t need hundreds of thousands of dollars. Smaller loans tend to be easier to manage and discourage overborrowing.
• Collateral is usually not a prerequisite for obtaining a microloan.
• Microlenders may offer extras like financial literacy training or mentorship to borrowers in an effort to help entrepreneurs thrive in their ventures.
• Straightforward, expedited application process compared to the small business loan process.

Cons

• Smaller loans would be limiting to business owners who need larger sums of money for expansion, pricey equipment, or those leading large-scale operations.
• Interest rates may be higher for micro loans than traditional loans, mainly to compensate for doing business with higher-risk borrowers.
• Repayment terms are usually shorter, leading to higher monthly payments. Money will likely be funneled out of the business over a term of 1 to 5 years (dependent on the business).

Is Microlending Right for Your Business Stage?

Microloans’ advantages make them the clear choice for early-stage entrepreneurs. These small loan opportunities make it possible for these individuals and businesses to enter a new market, fund early growth, and more. However, as a business grows, it may need to complement its micro loan with more substantial financing.

The Evolution: From Microloans to Small Business Funding

Many entrepreneurs start small with microloans but eventually reach a point where those funds are no longer sufficient for scaling. In cases like these, you may consider a small business loan.

How to Transition from a Microloan to Larger Business Funding

Whenever your business is ready to switch from a microloan in Canada to larger business funding, the below tips will help guide you:

• Strengthen your credit profile to qualify for larger loans. You can do this by paying all existing loans on time, keeping your credit utilization low, and consistently watching your credit report.
• Track revenue consistently so you’ll have hard evidence of income and profitability. Accounting software like QuickBooks and Xero are great for small businesses. Be sure to create monthly profit and loss statements and track your growth over time (metrics like customer acquisition and profit margin are a couple to start with).
• Build business history by getting a registered business name and compiling testimonials and success stories.
• Prepare for faster funding options in advance. Draft an executive summary and business plan, so it’ll be ready by the time you apply for a small business loan. You’ll also need a business funding pitch, and it helps to get familiar with your numbers (expenses, revenue, profit, etc.).

Conclusion: Let Your Funding Grow with You

Although microloans are a great starting point, they’re far from a long-term solution. It’s critical to ensure your funding solution can grow with you.

When you’re ready to explore larger funding options, Greenbox Capital is ready to assist you. After applying for a small business loan with us, you can receive funding in just 24 hours! Learn more about how to get a business loan in Ontario today with GreenBox Capital.