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 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.
Pros and Cons 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. Some lenders even have special microloan programs for women and minorities.
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 more on your long-term business goals and plans.
If you would like to improve your business credit score or have never borrowed from a bank before, a microloan can help improve your credit and establish a history of successfully paying back a loan.
Each microloan lender is going to have their own requirements for what borrowers need to provide. Some lenders may require collateral for a microloan.
Interest rates for microloans are often higher than they are for larger business loans with longer terms.
Uses for a Microloan
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.
The Small Business Administration (SBA) offers a microloan program. SBA microloans are available in amounts up to $50,000. Unlike other types of SBA loans, the SBA microloan program is funded with money from the U.S. government. Instead of applying through a lender like a bank or a credit union, people interested in SBA microloans need to apply through an approved non-profit organization, known as an intermediary, in their area. Each intermediary is free to set their own criteria for applicants to meet.
Applying for a Microloan
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.
3 Steps to Taking Advantage of SBA Loan Products