What is a Microloan and Should Your Business Consider It
What is a Microloan?
Microloans are small loans that can be utilized by startups or established small businesses. With less strict guidelines and more flexible terms, microloans are a good option for businesses that don’t qualify for traditional loans, including those that are just getting off the ground or have poor credit. Microloans can come from the Small Business Administration (SBA) or other lending organizations.
Typical Microloan Terms and Amounts
The most common microloan lender is the SBA. Their microloans are under $50,000, with an average amount of $13,000. The amount offered is based on your financial situation, your business’s needs, and how you plan to spend the money.
As previously mentioned, microloans tend to have more flexible terms and repayment plants. As noted in an article from Inc., microloan repayment plans can usually span numerous years and be paid in installments. While interest rates for microloans tend to be higher than traditional loans, often between 12 to 18 percent, the reasonable monthly payments are preferred by many small business owners.
Qualifying for a Microloan
While traditional business loans are often difficult to be approved for, microloans tend to have less stringent prerequisites. Still, eligibility for microloans depends on the individual lender. Be sure to review guidelines carefully before applying, for your best chance of securing the loan.
Applying for a Microloan
Like any other small business loan, you’ll apply for a microloan through a lender. When applying for a microloan, be prepared to answer questions that will be important to your lender. Lenders will want to see a detailed business plan, credit history, and plans for how the funds will be used. While credit score will most likely be taken into consideration, the requirements for credit scores and credit history tend to be more flexible with microloans. Being prepared will increase your chances of being successful in acquiring funding.
Using Your Microloan
Your microloan could come with guidelines about what you can and cannot use the funds for. Some lenders will be stricter than others when it comes to these guidelines. An SBA microloan can be used for working capital, business supplies and office furniture, additional inventory, and equipment. Other lenders may ask that you outline specific projects that you’ll be using the financing for.
Many small business owners use microloans to get their business off the ground. That often means investing in inventory and getting an office space. Even if the costs aren’t extremely expensive, they’re most likely out of reach for a startup, which is why a microloan can be beneficial.
Is a Microloan Right for Your Business?
If your business needs a relatively small loan for startup costs or additional working capital, a microloan might be the answer. The key is finding a lender that has terms you can work with, and with a mission that fits your business plan. Do your research, know your options, and come prepared when seeking funding to grow your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.