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Our Guide to Nonprofit Microlending for Small Businesses

By Barb Weidner Reviewed By Mike Lucas
By Barb Weidner
By Barb Weidner Reviewed By Mike Lucas

If you own a mission-based small business and find yourself strapped for funding, there are nonprofit lenders that serve companies that work to advance the public interest. 

Community-oriented businesses can often become profitable later than typical commercial projects, so it can be challenging to secure loans and business financing during those businesses’ early growth stages. Nonprofit lenders offer a service to the community issuing nonprofit loans for small businesses that are important social enterprises.

This guide to nonprofit small business loans will describe benefits of a nonprofit microfinance loan, how to apply for one and how to best ensure your approval for a microfinance loan.

What Is Microlending?

Your standard bank or credit union is more interested in issuing loans and other forms of financing that pose the lowest possible risk. In general, the higher the value of the loan, the riskier it is, so high-value loans tend to be the most exclusive.

This is where nonprofit microfinance loans come into play. Microlenders offer low-risk, low-value loans to small businesses and community organizations that need a modest supply of capital to bring a project to life or to pay outstanding balances. For example, while the SBA’s average business loan value is $107,000, the standard SBA microloan is only $13,000.

Business owners who lack business credit history, collateral or cash reserves can often be approved for a small microloan of $50,000 or less. Because microloans are often issued at 0 interest or low interest, they have a remarkably high repayment rate between 95% and 98%.

  • Most nonprofit lenders also offer a host of low-cost or pro bono services for small business owners. These services include:

    • Strategic advising
    • Leadership workshops
    • Skills development
    • Mentoring
    • Networking socials

Do you need a loan for your small business?

Why Should You Choose a Nonprofit Lender?

Nonprofit small business loans are best suited for business owners who run community-focused social enterprises that can’t secure working capital by other means.

For instance, if you operate a small upstart restaurant staffed by at-risk youth, or are a community worker who owns a soup kitchen, you could obtain a nonprofit loan to get the financing to buy a 100-gallon mixing vat for meal preparation.

Keep in mind that nonprofit lenders benefit business owners who need only a small sum of money to reach their short- or medium-term needs, such as getting out of a cash crunch or to cover short-term expenses.

The Benefits of Working With a Nonprofit Lender

Nonprofit lenders are far more lenient when it comes to approving businesses without a positive credit history.

Forget about FICO scores, balance sheets and other conventional indicators of a business’s creditworthiness. When it comes to securing nonprofit loans, your business is more likely to be approved based upon its social standing in the community rather than formal credit metrics.

Nonprofit lenders evaluate the extent to which the community stands to gain from the loan rather than how much they, as a lender, can benefit financially. In industry parlance, “social underwriting” governs whether a nonprofit microlender will grant a loan.

To bolster your “creditworthiness” during the social underwriting process, it is often necessary for the applicant to cite several — sometimes up to 25 — professional contacts in the community that can vouch for your business. If established community members endorse you, your application is more likely to be approved.

Unlike some banks and for-profit financial institutions, nonprofit microlenders thrive on building lasting relationships with business owners. Because their customers often have little or no credit history, business owners and nonprofit lenders must establish trust and rapport through interpersonal connections.

The Best Nonprofit Lending Institutions

Nonprofit lenders can be difficult to find — especially those with a solid reputation of true community-based lending to back them. However, a few standout organizations have a wide enough reach to serve most American small businesses. 

The two most common nonprofit lenders are crowdfunding companies and Community Development Financial Institutions (CDFIs) that focus on low-income applicants. There are several other kinds of nonprofit lenders that each have a unique business model. 

Crowdfunding Lenders

Through the collective power of crowdfunding, nonprofit loans for small business owners can be granted at rock-bottom interest rates. In recent years, technology has made it easier to bring business owners closer to their customers. However, the same is true of lenders and loan recipients.

Online crowdfunding, led by platforms such as Indiegogo and GoFundMe, have launched a revolution around peer-to-peer giving. However, peer-to-peer lending (P2P lending) has also taken off in recent years as banks and traditional lenders have tightened their belts. In the United Kingdom in 2015 alone, £2.8 billion was loaned through P2P lending institutions.

Crowdfunding lenders raise finances online through a pool of interested donors, investors and members of the community who share an interest in supporting community-based businesses. Best of all, crowdfunding sources offer no-strings-attached loans that do not require the sale of equity in the business.

CDFI Lenders

With the sponsorship of the U.S. Department of the Treasury, CDFIs stimulate economic growth by supporting small business and public interest initiatives where they’re needed most. The Treasury maintains a CDFI Fund that provides mission-driven financial institutions with resources that are lent to small business owners.

Those interested in applying for a CDFI microloan should apply directly to their local CDFI lender and not to the Treasury. These institutions can provide credit to in-need businesses as well as financial counseling and other low-cost services.

Accion International

Accion is a global nonprofit headquartered in Cambridge, Massachusetts. Founded in 1961, Accion provides individuals and small businesses with the financial resources they need to empower themselves or their cause. A community development initiative and CDFI, Accion is a leader in the microfinance loan industry and is dedicated to maximizing financial returns and social impact.

SCORE Foundation

The SCORE Foundation is a philanthropic organization that serves small businesses in the United States with financial and strategic resources. Powered by a community of 11,000 volunteers, SCORE provides confidential financial services to social enterprises and businesses that need short-term microloans.

Association for Enterprise Opportunity (AEO)

The Association for Enterprise Opportunity (AEO) seeks to bridge the multibillion-dollar credit gap that exists among small and midsize enterprises in the U.S. The AEO provides financial support, counseling and advocacy for small U.S.-based Main Street businesses. They manage the TILT Forward Network of mission-based lenders that provide microloan assistance to small businesses and minority-owned businesses.

Is a Nonprofit Microloan Right for Your Small Business?

Once considered a lender of last resort, nonprofit lending institutions are quickly becoming an attractive alternative to commercial banks and credit unions. If you run a community-focused or mission-based small business, nonprofit loans might offer you the best rates on a business loan as well as attractive term lengths and flexible conditions.

Business owners who don’t need six-figure loans should consider nonprofit lending as a viable alternative to standard bank loans. By taking advantage of their competitive rates and progressive social underwriting process, you can take your social enterprise to new heights, even with less-than-perfect credit.

Barb Weidner CEO at Fast Capital 360
Barb Weidner is the co-founder and CEO of Fast Capital 360, a leading online business loan marketplace. Prior to entering the Fintech space, Barb was the Chief Credit Officer for a mid-sized mortgage bank based in NY. Barb is passionate about simplifying the lives of small business owners and empowering them with the resources they need to thrive.
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