When Justin Gold, founder of Justin's, started his nut butter business, he didnʼt need a million dollars. He just needed enough to jump the next hurdle in his small but quickly-growing company. That's where a microloan from Whole Foods Market came in.
"Microloans are a great financial bridge,” Gold said. “They make funds available for companies that have not yet developed the track record that traditional banks require.” And more importantly, they allow founders to maintain ownership of the company.
"When you take an investment, youʼre selling ownership in the form of equity in your business," said Steve Hoffman, founder and managing director of Compass Natural Marketing. “But when you get a loan, if you can work it into your monthly cash flow, youʼre financing growth without giving up equity or control."
It's relatively easy to bootstrap a new business during the earliest phases of growth. But when youʼre ready for your first big leap—say, retrofitting a kitchen or moving to preprinted film—and need a cash infusion, microloans can help. Generally, a microloan is defined as one that's very small—usually $50k or less—and is available to borrowers who don’t qualify for traditional loans. The concept originated as a way to help fund businesses in developing countries, but they’re now widely available to entrepreneurs and small businesses in the United States.
Before you take out a microloan, take these tips into consideration:
- Be sure you’ll be able to meet the monthly payments, and look for interest rates at 5 to 9 percent.
- Have a solid business plan, and be prepared to pony up some collateral or cash of your own.
- Check the terms of the loan (ideally, have your attorney review them) and know what the policies are for early repayment of the loan, late fees, fixed rates, processing fees and other details.
- Be sure you’re aligning yourself with a reputable company—check the Small Business Administration’s (SBA) website for a list of approved lenders around the country.
Consider these four microloans geared toward the natural products industry:
1. Whole Foods Market Local Producer Loan Program.
This is a core microloan program offering low interest rates for small-scale, local producers, said Hoffman. Loans range from $1,000 to $25,000 for start-ups, with an interest rate ranging from 5 to 9 percent. Funding is limited to producers who meet Whole Foods' quality standards, which can be rigorous. The money must be used for expansion and capital expenditures like equipment, rather than for operating expenses or to fund new ventures. Qualifying businesses must also be located within a few hours’ drive of a Whole Foods Market. You aren’t required to be in Whole Foods Market, but companies that have an existing vendor relationship with Whole Foods are more likely to get a loan.
To apply, you must have a working business plan and demonstrate adequate cash flow to service the debt. And you'll need to provide some collateral, which can range from a car to a piece of operating equipment. If your initial loan is in good standing after a year, you can apply for additional financing if needed.
The biggest advantage: It’s a simple, straightforward process that can also solidify a relationship with Whole Foods, and often includes mentoring. For details, visit the Whole Foods Market website.
2. Slow Money.
Slow Money is a national organization based on the principles of Woody Tasch’s “Slow Money” book, which promotes the idea of taking money out of the stock market and instead using it to facilitate small, affordable peer-to-peer loans. The organization includes 17 local chapters and six investment clubs across the United States and in nine other countries. Through national gatherings, regional events and local activities, more than $30 million has been invested in more than 220 food startups and small businesses.
The latest venture, called Gatheround, a live online event that’s similar to crowdfunding. Here's how it works: potential “lenders” sign up for an online event with a $25 donation; that money is then pooled into a non-profit fund. Selected small businesses present their companies at the event, which includes interactive Q-and-A sessions, and at the end of the event, participants choose which companies they’d like to fund. The loan then goes to the selected companies in the form of a zero-percent interest loan. In addition to funding, Gatheround is also a useful PR tool, says Hoffman, and is a great way to present your business to a national crowd.
Kiva, a nonprofit web-based microfinancing organization is one of the pioneers in the small-loan arena. Though Kiva’s focus has traditionally been on struggling, developing-world entrepreneurs, funds are available to U.S. startups as well. In the United States, Kiva works with ACCION USA, which helps grow businesses in all areas of the country; ACCION Texas-Louisiana, which provides business loans and lines of credit for small companies in those two states; and Opportunity Fund, which focuses on small businesses in Northern California.
Kiva is also piloting a new program called Zip, in which small businesses or entrepreneurs can borrow up to $5,000 at a zero-percent interest rate. To apply for a Kiva Zip loan, a borrower must fill out an online application and be endorsed by a trustee. Then lenders visit the Kiva Zip site and choose which borrowers they want to support. Funds are then sent directly to the borrower. In addition, Kiva Green Loans provides funds for sustainable businesses and entrepreneurs focusing on clean and efficient energy sources of energy—for example, installing solar panels, buying organic fertilizer, or transitioning to more efficient cookers or gas stoves.
4. SBA’s Microloan Program.
Administered through the U.S. Small Business Administration, this program offers loans averaging around $15,000 (or up to $50,000) for small businesses to initiate and grow their operations. The money can be used for a variety of expenses, including inventory, equipment and working capital. Loans are available through SBA-approved intermediaries, which are generally non-profit, community-based organizations. Each of these intermediary lenders has its own requirements for lending and credit. Generally, though, you may be required to fulfill training or planning requirements, and you can expect a maximum repayment term of six years.
The downside: Interest rates tend to be higher—up to 13 percent—than other types of microloans, and if your community doesn’t have an intermediary, these loans are harder to get.