Getting ahold of capital for a small business is challenging for many people. Bigger banks often prefer to approve loans for larger businesses than small ones. It's also harder to get a loan when you're still building your credit profile to prove that you're a trustworthy borrower.

The good news is a community bank is more open to providing loans to small business owners. This type of bank is more likely to support mom-and-pop shops and other small family-owned and independent businesses. And as with most loans, you must have ample credit history with good financial records to secure a loan. If you have no credit history, you can start building it by paying your bills on time and self-reporting your accounts to the proper credit bureaus.

Another good way to build your credit score and get a loan is to take part in a social borrowing circle. This allows you to participate in a lending program even if you don't have much of a credit record. Read on to find out more about what a social borrowing circle is and how it will benefit your credit score.

What is a Social Borrowing Circle?

A social borrowing circle, also called a social lending circle, is traditionally comprised of close family and friends who come together to help each other financially. When banks are not an option, people all over the world rely on their community to borrow money. Today, the social borrowing circle has evolved into a lending model where a group of individuals, such as small business owners, can borrow a loan together and co-guarantee each other's loans.

Social borrowing circles have been practiced in many cultures for more than a hundred years. And depending on where you go, this system is known by different names. Social borrowing circles are known as "susu" or "sou sou" in Caribbean and African countries. A similar concept is known as "tanda" in Mexico, while in the Philippines, it is called "paluwagan”.

People use the social borrowing system to build savings and get small loans from their social circle. Small businesses can even participate in the social borrowing process. It’s also a great way to build your credit profile, especially if you’re planning to increase your credit score to gain access to loans.

It Helps Build Your Credit Record

Social borrowing circles are important tools for people with little or no credit history. Joining one helps build your credit profile, which will eventually enable you to secure different types of loans, including small business loans. This borrowing system is also more affordable because it usually charges little to no interest. In California, for example, small business owners who have built up a solid credit score may want to approach the California Small Business Loan Guarantee Program, a loan program guaranteed by the California Infrastructure and Economic Development Bank, which infused more than $229 million into statewide small businesses in the last fiscal year.

Small business owners from disadvantaged communities can also apply for a loan with the California Rebuilding Fund, which works with Community Development Financial Institutions (CDFI) to help process loan applications for small business owners that cannot access credit from commercial banks.

To build your credit record, make sure to join a borrowing circle that reports payments to at least one of the top credit reviewing agencies, such as Equifax, Experian, and TransUnion. Otherwise, your payments will not be recorded under your credit history. A record of consistent monthly payments will help boost your financial background.

Here's how joining a social borrowing circle builds your credit profile:

• Adds active accounts to your record - Reporting an active account that shows you are making regular payments improves your credit history. It helps make your credit record substantial enough to be scored.

• Grows your credit mix - Having a variety of loans under your record suggests that you can manage to pay for different types of debt. This is a good sign for credit reviewing agencies, giving the impression that you are a responsible borrower.

• Records timely payments - Having a history of on-time payments is a significant factor that builds your credit profile and helps increase your credit score. Missed or late payments, on the other hand, decrease your credit score and reduce your chances of getting a business loan in the future.

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What Makes Asenso Finance's Model Unique

In the Asenso Finance model, small business owners apply for a loan in groups of five through a social borrowing circle. This helps reduce the lending risk, making it possible for community banks and CDFIs to support more small businesses in need of loans. This structure works to provide affordable, zero-collateral credit for small business owners.

What sets it apart from traditional social borrowing circles is the time it takes for borrowers to get their loans. With Asenso Finance, each member of the circle receives their loan amount at the same time. These members get their loans sooner than traditional social borrowing circle programs that may take months for a borrower to receive their loan.

In our model, members serve as co-guarantors of each other’s loans. They can help one another keep track of their monthly payments, ensuring their loans are paid on time. In addition, our model provides interactive financial literacy courses that educate borrowers from underserved communities. Ultimately, Asenso Finance provides small business owners the chance to secure a loan to support their business needs while learning financial management.

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Our Bottom Line

Taking part in a social borrowing circle is a great way to build your credit while participating in a lending program. It's a convenient, low-cost way to get a small windfall even if your credit background is thin or you have a low credit score. It’s also a better option than turning to expensive payday loans that are too risky for low to moderate-income borrowers.

It’s also crucial to look for a formal social borrowing group to make sure that your payments are reported to the proper credit reviewing agencies. With a good credit record, you'll be on your way to securing a loan for your small business.

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