Whether you’re just starting up a business or you’re an entrepreneur with a proven track record, you might find yourself in need of financing to realize your dreams of success. In today’s business climate, you may find it difficult to qualify for a traditional bank loan. If so, a microloan could be the answer.
What is a microloan?
As the name implies, microloans are loans for relatively small amounts of money, usually less than $50,000. Generally speaking, microlenders have more flexibility in deciding who to lend to than traditional banks. Meeting their standards for credit rating, collateral and business history isn’t as difficult, making the loans easier to qualify for. Because of this, interest rates on microloans will be somewhat higher than loans from traditional banks, but nowhere near the cost of some types of financing such as credit cards or merchant cash advances.
How are microlenders different from banks?
In an interview with Inc. magazine, Laura Kozien, Senior Director of Marketing & Communications for the Accion U.S. Network, says, “Our requirements are set so that people who wouldn’t be able to obtain a loan from a bank can obtain a loan from us.” Women, lower-income individuals and minorities are just some of the groups who have typically been able to borrow more successfully from microlenders than banks.
Microlenders are non-profit organizations that specialize in helping small businesses get the financing and support they need to be successful. Microlenders frequently offer other types of support in addition to loans, such as education and training. They might provide help with business plans, marketing strategies, and other concerns of their small business clients. They make loans that banks usually find too small to be profitable, but ones that are vitally important for businesses to start up, hire staff, buy inventory or equipment, grow and expand.
Microlenders generally require less documentation and are more flexible with their underwriting criteria. Most will look at the whole story of a business when making their decision, rather than simply plugging numbers into a computer and having it spit out a yes or no answer.
Because microlenders tend to take a more holistic approach to their approval process, credit is just one piece of the puzzle they’ll look at. That means you’re a stronger candidate when the other pieces fall into place. If you’re a startup or don’t have much of a company history, you’ll need to have a strong business plan in place.
Who is a microloan right for?
Many microloans are made to sole proprietorships and small businesses with only a handful of employees. Often, companies like these can find it very difficult to secure financing from more traditional sources. Such businesses may be home-based, operate online, or out of a local storefront, e.g. beauty salons, restaurants, and small retail shops.
Business owners with more of a business history and a higher credit rating might find microlenders a more attractive option for financing, especially if they’re looking for a relatively small amount of money. A microloan allows you to borrow just what you need without saddling yourself with too much debt, and is usually payable in equal monthly installments so you can budget in advance.
As you prove yourself by paying back the loan, it’s likely you’ll qualify for a lower interest rate, making it cheaper to borrow the next time. If you don’t have much of a credit history, some microlenders will approve you for a small, short-term loan that will help you build and establish credit so you can borrow larger amounts going forward.
To increase your chances of getting approval for a microloan, demonstrate good character, be professional, and complete the loan application fully and honestly. You’ll have to show enough cash flow to be able to make your payments, and be current on all your business and personal bills, with no bankruptcies or late mortgage payments in the last year, and no foreclosures in the past two years. You may have to provide some collateral as security for the loan, and you may be asked to sign a personal guarantee.