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Microloans

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Not all businesses need loans for large amounts of money. In many cases, business owners who apply for traditional business loans are turned down simply because they aren’t looking for loans large enough for the lender to see them as being worthwhile. To help businesses grow by handling those less expensive needs, some lenders and other organizations offer microloans.

What Is a Microloan?

A microloan is simply a business loan for a relatively small amount of money, less than $100,000. In the United States, the average amount of a microloan ranges between $10,000 and $13,000. Microloans are a type of short-term loan and are typically meant to be paid off within a year. 

Traditional lending institutions, such as banks and investors, are unlikely to offer loans and investment capital to small businesses due to a variety of reasons. One barrier to microlending is a concern that startups and smaller enterprises are risky investments since growing businesses typically show dramatic bursts of growth and downturn. The perceived risk of these types of companies reduces the chances of a microbusiness obtaining business financing.

Another issue is that less established businesses typically require smaller amounts of capital, and lenders often believe that it is not an efficient use of their time or resources as they will not receive a substantive return on investment.

Types of Microloans

Expansion Microloans

You’ve been in business for a while and you’re ready to grow. Maybe you’re opening a second location or branching out into new products or services. Expansion microloans can help fuel that growth without putting undue stress on your finances.

Inventory Microloans

Running a retail or product-based business? Inventory microloans can help ensure you’re always stocked up and ready to meet your customers’ needs. They’re specifically designed to support the purchase of inventory, helping you stay competitive even in peak seasons.

Emergency Microloans

No one can predict a sudden mishap or market downturn. Emergency microloans provide a safety net, so you can bounce back quickly without draining your resources.

At Credibly, we believe in your potential. We see you as more than just your bank statement or credit score. We’re here to offer you an alternative path to secure funding, one that respects your unique situation and supports your growth.

How Does Microlending Work?

Microlending is a powerful tool for businesses just like yours. It’s like a breath of fresh air in the often rigid world of financing. Instead of weeks or months of waiting, microlending can get you the funds you need in just days. It’s all about speed, flexibility, and an easy online process.

Here’s how it works: You submit an online application, sharing details about your business and your needs. Once your application is approved, funds are transferred to your account. You then use those funds to grow your business, whether that means buying new equipment, hiring staff, or expanding your inventory.

Advantages of Microloans

Many different types of businesses can qualify for a microloan even if they aren’t able to get a regular business loan. Unlike many other types of business funding, microloans are more accessible to startups and young businesses with a brief operating history. Microlenders tend to provide a pathway for small-business owners to receive the capital they need to grow their operation while building their credit score, improving your opportunity to obtain more traditional debt financing in the future. In addition, many microlenders will guide you through the loan process and offer advice to increase your likelihood of approval and sustained success. Plus, microloans can take as little as 14 days to be approved, whereas traditional loans backed by the SBA can take months.

Lenders who offer microloans do consider your credit score. However, since microloans are most typically sought by businesses who need a small amount of money for something that will allow them to grow and expand, microloan lenders are generally more inclined to focus on your long-term business goals and plans. Because microloans are more forward-looking in nature, you should not let a weak credit history prevent you from applying.

These programs make a huge difference in improving access to capital for female and minority entrepreneurs who are far less likely to be approved through traditional banks and lending institutions. With microloan programs dedicated specifically to these affinity groups, many businesses that would typically have a tough time receiving debt financing have an outlet they can look to for financing.

Disadvantages of Microloans

Microloans have a few drawbacks, but the biggest is the smaller funding amounts and the inflated interest involved. While you’ll pay less interest than a typical credit card, you will most likely have a higher cost of capital than you would if you received a traditional bank loan. And if you need a large sum of money to get your business off the ground, a microloan may not be helpful. It is also important to note that a missed payment on a microloan can still hurt your credit just as much as defaulting on a conventional loan.

Is a Microloan Right for Your Business?

Microloans can be a game-changer for a small business, but they aren’t right for everyone. While microloans are great for businesses who only need small funding amounts, or for ones who have difficulty applying for other financing options, they aren’t the cheapest option for established operations.

In many cases, business owners who are interested in microloans are seeking money to pay for something that will help fuel their business’s long-term growth. Microloans can be used for a very wide variety of purposes, including paying employees, purchasing inventory or equipment, and marketing expenses. Since microloans have shorter terms than regular business loans, they’re not recommended for making major purchases like buying real estate or other long-term investments.

When applying for a microloan, consider how much capital you need, what you plan to use the capital for, and how likely you are to qualify for other financing options. Just because you can qualify for a microloan doesn’t mean that it is your best option.

Although applying for a microloan isn’t as complicated as applying for a larger business loan through a bank, careful planning will increase the odds of your application being successful. Lenders will still want to see a business plan that includes details about how you plan to use the funds from your loan and how it will help your business thrive in the long run. Many lenders also like to see that you have invested some of your own personal money into the business or would be willing to do so.

Microloans are an excellent loan option if your business needs a small amount of capital without the complications involved when applying for a larger business loan. Additionally, many microlenders can help provide the resources your business needs to reach the next stage of growth, which can be invaluable.

How to Qualify for a Microloan

Qualifying for a microloan with Credibly is more about your potential and less about your past. We don’t bog you down with red tape or judge you solely on your credit score. Instead, we focus on what you can achieve.

While every lender has different requirements, here’s a general idea of what you’ll need to qualify for a microloan with us:

  1. A Clear Business Plan: Show us your vision. We want to understand your business, your market, and your plans for growth.
  2. Positive Cash Flow: While we’re not as stringent as traditional banks, demonstrating a positive cash flow helps us understand your ability to manage the remittance.
  3. Time in Business: We do ask that your business has been operational for a while. Remember, we’re not a start-up lender. But if you’ve been in business for some time and need a boost to reach the next level, we’re here to help.
  4. A Passion for Growth: We’re looking for businesses that want to grow, not just maintain. Show us that you’re ready to take your business to the next level, and we’ll do our best to help you get there.

Frequently Asked Questions About Microloans

Microloans come in all shapes and sizes, just like the businesses they support. Here are a few examples:

  • Inventory Microloans: Let’s say you run a thriving boutique and you’ve got a big sale coming up. An inventory microloan can help you stock up, ensuring you’re ready to meet the demand and maximize your profits.
  • Equipment Microloans: Perhaps you own a bakery and your oven breaks down right before the holiday rush. An equipment microloan can help you quickly replace the oven, so you can keep the pastries coming and your customers happy.
  • Working Capital Microloans: Maybe you run a landscaping business and you have a big project coming up, but you need some funds to bridge the gap until the client pays. A working capital microloan can tide you over, ensuring you can pay your team and suppliers on time.

Microloans are an excellent tool for many businesses, but like any financial decision, it’s important to weigh the pros and cons:

Pros:

  • Fast and Flexible: Unlike traditional bank loans, microloans are quick, often securing funds in days, not weeks.
  • Easier Qualification: We look at more than just your credit score. We’re interested in your business and its potential.
  • Little Collateral Needed: Most microloans require very little collateral, if any at all.

Cons:

  • Not for Large Expenses: Microloans are typically smaller, so they may not be the right fit if you’re looking to fund a major expansion or large purchase.
  • Higher Interest Rates: Compared to traditional bank loans, microloans can sometimes have higher interest rates. 

The amount of a microloan can vary widely based on your business needs and qualifications. However, microloans typically range from a few thousand dollars up to $50,000.

Remember, our team at Credibly is here to help you navigate these decisions and find the right solution for your business.