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Three weeks after the February 2016 launch of New York-based event marketing company The XP Agency, the company landed its first client.
“In order to complete the project, we needed $60,000 to pay for our upfront costs of producing the event,” co-founder Tamara Francois says. “Neither my business partner or I had the funds to cover these costs, so we sought a business loan.”
Traditional lenders turned them down, so Francois went to an alternative lending non-profit called Community Capital, which offered microloans — small short-term loans designed to give small businesses working capital. After submitting their business plan and proof that they had a signed contract from a major corporate client, The XP Agency secured a $10,000 microloan and a $100,000 line of credit. “I don’t think we would have been able to sustain our business without it,” Francois says.
Microloans can transform business for small companies such as The XP Agency. The Small Business Administration has a microloan program that works with non-profit community organizations across the country to provide loans to local small-business owners. While microloans are typically $50,000 or less, businesses in regions that have less access to capital may qualify for up to $250,000.
The maximum repayment period for SBA microloans is six years, and the average SBA microloan in 2016 was $13,533. But the SBA is not the only game in town.
The microloan market has evolved in the past five years, says Antara Dutta, a social entrepreneur and mentor with the Delaware chapter of SCORE, a volunteer network of small-business advisers. Many non-profit organizations, foundations and peer-to-peer lending networks have also entered the microloan market.
One such company is Funding Circle, a San Francisco-based lending platform that connects investors with small-business owners. “Banks have really pulled back from doing small-business loans over the past decade,” says Sarina Siddhanti, Funding Circle’s U.S. Head of Commercial. “We fill that gap.”
While Funding Circle awards business loans up to $500,000, they also offer microloans to entrepreneurs who need less. One of those entrepreneurs was Bret Morey of Charlotte.
Morey and his son, Elijah, were bit by the business bug in 2014, thanks to their mutual love for hot peppers. When Elijah was 12, he asked his father if they could create their own hot sauce. That led to the launch of hot sauce company Elijah’s Xtreme. After creating another sauce in 2016, Morey ran into a problem most business owners experience when moving from one level to the next.