As you know, a lot of different loan options are available to small business owners who need extra money to either get their business off the ground or take it to the next level. Depending on your needs, however, one type of loan may be better than another. Microloans are one of the best options for business owners who don’t need a large loan, may not have the best credit, or who want a shorter term than traditional loan options.
What is a Microloan and How Can They Be Used?
Put simply, a microloan is exactly what it sounds like—a small loan for small businesses. A microloan does not exceed $50,000 but can be as small as $500, depending on your lender. The interest rate for a microloan is usually between eight and 13 percent, and the term length is six months at most.
Microloans can be used in a number of different ways. They can be used to push your startup forward, purchase equipment or inventory, furnish an office, buy supplies, or cover other general business expenses. Naturally, you need the loan because you don’t have enough money of your own to fund a project or get the supplies that you need.
That said, if you are applying for an SBA-backed microloan, your lender may require financial statements that show your income level to determine your actual need, since SBA-backed loans are only given to those who need them most.
What are the Benefits?
Microloans help build credit. If you’re just starting your business and don’t have a perfect credit score already, a microloan can help you build your credit up to where you would like it to be. You’ll get the funding that you need and boost your credit score so that you can qualify for larger loans later as necessary.
SBA-backed microloans come with business training. The US Small Business Administration (SBA) requires that SBA-backed microlenders offer business training and technical support to borrowers. The training may be required before you’ll be considered for the loan, but it can be a huge advantage if you don’t have much experience in the business world and can provide you with extra support.
Microloans are easier to qualify for than traditional loans. Traditional loans will often have stringent requirements that are much higher than they are for microloans. This means that even if you wouldn’t qualify for a traditional loan due to less-than-stellar credit, not having enough collateral, etc. you can still get the capital you need.
Microloans are available to everyone. No matter what type of business you’re in, you have the option to take out a microloan. Whether you’re a farmer, an e-commerce business owner, or even if you’re an individual wanting to do renovations on your home, microloans are an option for you.
Microloans do not typically require collateral. Different lenders have different rules and requirements, but microloans do not typically require collateral. This means that you won’t likely have to put up your car or house in order to get the loan that you need, or if you have no collateral at all, you’ll still be able to get the funding necessary to get your business going.
How do You Qualify?
The qualifications for a microloan may depend on your lender and the status of your business. Businesses that have already been in operation must have positive cash flow, an acceptable credit score, and meet other requirements. New businesses must have capital in the business, a decent credit score, a realistic business plan, and so on. When applying, you should ensure your business plan is finalized, clean your credit report as best you can, consider offering collateral if you have any available, be prepared to put some of your own money into it, and show how you will repay your loan.
Where Can You Apply?
There are a wide variety of different microlenders you can choose from, some of which are backed by the SBA and some of which are independent. It’s important to contact a few different lenders to learn about their requirements and policies, current rates, and what the general terms of the loan might be. While an SBA-backed loan does have some benefits, they can be more difficult to obtain and some business owners may be able to find equally favorable terms with an outside lender.
If you’re considering a microloan, contact us today. We work closely with trusted lenders, offer lending services, and would be happy to help you by answering any questions you may have. Let us connect you with a lender who would be a good fit for you.