You’ve probably considered applying for a small business loan if you are starting a new business and require money to get started or if you want to expand your business and you need to hire staff or purchase new equipment. If you do not have a long credit history, you may be unable to access many mainstream lending options. A microloan, which is a less-known option, can provide a small amount of money at a reasonable rate while also boosting the local economy.
What is a Microloan?
There are many small business loans available. Each loan type comes with its own set of stipulations. These include payment periods, interest rate requirements, and eligibility requirements. Microloans are a form of microfinancing.
Microloans are small loans ranging between $500 and $50,000, which must be repaid in a short period. These loans are usually between 2.25% to 18% in interest rate and are given to help small businesses start up and grow. Nonprofits generally provide these loans and make up a very small percentage of all business loans in the U.S. American Express estimated once that only 400 financial organizations offer microloans for entrepreneurs.
The U.S. Small Business Administration’s (SBA) microloan program is often used as an intermediary lender to provide funding for nonprofits. The SBA loan program doesn’t “review or underwrite a microloan,” but it does set guidelines. For example, the $50,000 maximum is one of the regulations. The SBA’s loan program has other regulations, such as a maximum term of six years and the requirement that funds cannot be used to pay existing debt or to purchase real estate.
Microloans can be used to get a small amount of money for things such as buying inventory, paying your employees, or covering seasonal costs. You can also use them to build your credit.
The SBA funds microloans through nonprofits or intermediary lenders to give fledgling companies a financial boost.
Who should be considering a microloan?
Microloans were designed to get small businesses up and running. If you need a small loan to launch a new business but don’t have the credit score to qualify for a traditional lender, then a microloan may be a good option. Microlenders have less stringent loan requirements than traditional lenders, making them easier to get.
Many microlenders also use their loans to fight inequities that exist in the capital provided to small businesses in certain areas of the country. It’s hard for anyone to get a bank loan, but the chances of getting rejected are much higher for women and minorities than their white male counterparts. The situation is even worse for communities with a majority of nonwhite residents.
To that end, microloan lenders or mission-focused/mission-based lenders tend to provide these loans to minority- or female-owned businesses, businesses serving disadvantaged communities or low-income entrepreneurs. It’s not that white-owned companies can’t receive a loan, but the lenders will look at whether or not the borrower’s business and overall scope are aligned with their mission. See the top challenges that women entrepreneurs face.
Microlenders are more likely to lend money to new businesses or certain types of entrepreneurs. You may not be eligible if your company has been operating for many years.
How do you qualify for a Microloan?
Microloans, which are seen as starter loans by professionals to build up credit for a company before they move on to a conventional loan, are easier to get than traditional loans. Although the microloan application process is quicker and less strict, there are some things that you can do in order to prepare.
As a small business owner, you can improve your chances for approval by taking the following steps.
Create a business strategy
You’re a new entrepreneur, and you have probably already developed a business plan that outlines how you intend to grow your company from a start-up operation into a profitable one. You’ve probably already done this step if you have previously applied for a loan from a traditional bank. You can give lenders peace of mind by showing them your business plans and proving how serious you are about your venture. If you don’t have a business strategy, you should outline the following: how your business will make money, what products or services it will offer, and how you plan to attract new clients.
Order your financial and credit houses
It’s important to consider your financial situation before applying for any loan. Calculating how much money you can afford to repay every month will give you an idea of what you can borrow realistically and for how long. Microlenders are generally more relaxed when it comes to the money they lend to small businesses, but they still have to be repaid. Failing to do this can lead to financial problems just as bad as defaulting on a traditional business loan.
It is also important to ensure that your personal and business credit scores remain in good standing. Although microloans tend to be suited to businesses with little or no credit, lenders will often check an applicant’s credit history in order to determine how they handle their money. Correct any errors on your credit report, reduce your credit balances, if you can, and improve other aspects of your credit report. You should find it easier to get approved by most lenders after you’ve done this. [Read the related article: Factors that Keep You from Getting a Small-Business Loan ]
Prepare collateral or a guarantee for a loan
Small businesses and entrepreneurs who have little or no credit history can receive microloans. Most lenders require business collateral as a form of assurance since they cannot rely on a record to determine a borrower’s trustworthiness. You can show the lender you are committed to repaying the loan in full by offering a valuable piece of real estate as collateral. You will lose the collateral if you default on your loan, and your credit rating will be affected.