What is a Microloan?

Microloan for small businesses are a powerful option for those who lack easy access to capital or whose credit history holds them back. They can help young companies get off the ground or expand, paying for anything from new equipment to operating expenses. These loans have low rates, don’t require perfect credit, and are usually supplied by lenders who help their borrowers succeed. 

The microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000. Microloans  can  be used for a variety of purposes that  help small businesses expand. Use them when you need  less than $50,000 to  rebuild, re-open, repair, enhance, or improve your small business. Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. Individual requirements will vary.

Microloans are a good fit for small businesses that are in their early stages and need a bit of extra cash to get things off the ground. They can also be helpful to established small-business owners who need a relatively small amount of funding for a discrete project that will propel their business forward. Both new startups and established businesses may be able to get access to microloans. 

Many microlenders have a goal for their lending—for example, to support minority businesses or to help small-business owners improve their credit. Good candidates for microloans are small-business owners who need a relatively small amount of funding and who have an identity or a purpose that fits with the mission of a particular microlender.

What about Microlending?

Microlending is the method of issuing small loans called microloans to small business owners. These small business owners—often in developing countries—may not have access to traditional financial products or financial institutions. Instead, these small businesses work through non-traditional loan service channels to secure financing needs. 

How does Microlending work?

Microlending works in a similar manner to other business lending: a potential borrower applies, receives approval, gets access to funds, and then pays the loan back over a period of time, with interest. 

Before you can apply for a microloan, you have to qualify to become a borrower of the lender you want to do business with. Typically, you must be a for-profit small business with average credit; good credit usually isn’t required, and some lenders don’t even check your credit. Each lender has its own requirements for eligibility, so pay close attention to the details. You may need to be located in a specific region, state, county, or city; come from a certain underrepresented community; or have a particular goal in mind for the funding to support. 

For example, you may borrow $1,000 to order the first round of inventory for your small business. The foundation of this funding could be the platform that launches your business to great heights. But it wouldn’t be possible without that initial microloan. 

  • Manageable loan amounts: You can find microloans that range from $500 to $50,000. But the average is a $13,000 microloan. 
  • Microloan programs often focus on a particular group: Many microloan programs are centered around helping a community of people achieve a new measure of financial success. 

Microlending Risk and Reward

There are specific reasons a borrower and a lender may be interested in entering into a microloan. Often, an advantage for one party is a disadvantage for the other. Let’s review the pros and cons for both. 

Pros and Cons of Microlending

Pros :

  • Early-stage businesses can get access to startup funding.
  • Average credit is usually sufficient to qualify.
  • Rates are usually lower than for typical business loans.
  • You may get guidance or coaching along with the loan.
  • Able to secure financing whereas the borrower may not quality for traditional loans
  • Often able to secure financing quickly assuming you meet necessary requirements

Cons :

  • Will likely have short repayment term (sometimes as little as one year)
  • Are often limited on what you are allowed to use the microloan for
  • Able to only secure a small amount of financing (usually up to $50,000)
  • You may not qualify unless you fit specific parameters defined by the lender.
  • The lender may restrict how you can use the funding.

Where Can You Get a Microloan for Your Business?

Microloans for small businesses are widely available. Here’s where to start your search for a microloan:

  • SBA microloan program: The Small Business Administration works with approved lenders who provide microloans of up to $50,000. The lenders are nonprofit community-based organizations that work with eligible borrowers. Although each specific lender has its unique requirements, most require some collateral and the personal guarantee of the business owner. Here’s how to apply for SBA microloans. 
  • USDA microloan program: Farmers can obtain a loan of up to $50,00 through the U.S. Department of Agriculture for farm-related costs. For example, you can use the funds to make a down payment, finance farm equipment, improve farm buildings, buy essential tools, purchase bees, and more.
  • Peer-to-peer microloans. Investors can provide microloans to business owners through various peer-to-peer lending platforms. Check out the top peer-to-peer lending platforms today and discover what is a peer to peer lending is.
  • Community development organizations: A community development bank or credit union aims to build up an area’s people. With that, microloans may be readily available for entrepreneurs. 
  • Nonprofits. Many nonprofits offer microloans to their communities. A few nonprofits that offer microloans include Grameen American, The Opportunity Fund, Accion, and the Women’s Inititans for Self Employment. 
  • Online lenders: Many online lenders offer small business loans of less than $50,000. With reasonable rates and plenty of options, finding a microloan through an online lender is smart. Check out the best online small business lenders today. 
  • Crowdfunding platforms: Crowdfunding platforms like Kickstarter are one way to finance your business needs. The best part is you won’t want to repay your backers because it’s not a loan. Instead, you’ll provide a product or service after you meet your funding goal. To discover more, see what crowdfunding is. 

How to Apply for a Microloan?

A microloan would be what your business needs to get off the ground. Here’s what you’ll need to do to apply:

  • Create a business plan: Regardless of the funding you seek, a business plan is a critical piece of the puzzle. Not only will a business plan show a lender you have a serious strategy, but it will also serve as a roadmap for you while building your business. 
  • Check your eligibility: Each lender has slightly different requirements for their microloans. But they should clearly state their needs on the application. Some will require that business owners meet specific demographic affiliations or have proof of reliable payment history. Make sure you are eligible for the loan before taking the time to fill out an application. 
  • Choose a microlender: Beyond checking your eligibility, compare the loan offers available. You’ll want to choose a lender with the best general terms and rates. Otherwise, you are overpaying for the funding you need. 
  • Gather your application documents: Every lender will require extensive information about you and your small business. Be prepared to provide a government-issued ID, proof of income, business financial statements, personal financial statements, a detailed business plan, a list of references, and your plans for the loan. Sometimes, you might need to provide proof of collateral or a loan guarantee. 

What are The Benefits of Microlending?

For a borrower, microlending may be the only way to secure financing. Microloans are often given to borrowers even if they have bad credit or want a loan smaller than what traditional financial institutions allow.

For an investor, microlending allows for further portfolio diversification. The investor also has greater control over how much money to invest and to whom they want to give the loan.

In conclusion, Microloans are a useful option for small business owners that just need a little boost. The relatively high financing costs could deter you from taking advantage of this option. But since you don’t want to take on more debt than you can chew, a microloan offers a great solution. 

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