It doesn’t seem that long ago that small businesses and startups struggled to gain funding for their venture. Now, thanks to the emergence of several alternative lenders, small business owners can obtain finance through unsecured loans, including microfinance.
Microfinance (also known as microloans and microcredit) has become a popular form of small business finance, as it can help to launch and grow a small business or cover start-up costs and other expenses.
We’ll delve into microloans more below, including their pros, cons, and how you can apply for microfinancing.
Firstly, what is a microloan?
A business microloan is simply a small loan, which can range anywhere from $100 to around $50,000, although this will largely depend on the lender. Since these amounts are smaller than traditional loans, they tend to be shorter in repayment periods too, usually taking place over 3 to 12 months.
Additionally, microfinance loans are often unsecured, meaning that they don’t require collateral (including personal assets such as your home or car) to secure the loan. Collateral simply refers to something that you or your business owns that you pledge as security for repayment. Although unsecured loans don’t require this, many lenders will ask for a personal guarantee from the director of the business to ensure the loan will be successfully repaid.
How can small businesses benefit from microfinance loans?
Due to their quick and easy application process, microloans pose a number of benefits for small businesses. These include:
Microloans offer business finance to those who can’t obtain a loan from a traditional bank
Many businesses can’t access traditional business loans (such as secured or long term loans from banks) due to their smaller gross annual turnover, poor credit rating, or because they haven’t been operating long enough. This is where a microloan from an alternative lender can help, as their requirements seem to be more accessible for start-ups and small businesses.
Microloans can be used to build your credit rating
Remember how we said earlier that some small businesses can’t seek other types of business funding due to their poor credit history? This is another area where microloans come in handy, as they can be used to help an individual or enterprise boost their creditworthiness.
All you have to do is repay the loan within a timely manner (certainly within the repayment period) and you’re on your way to obtaining a better credit score.
Microloans are the perfect option for those wanting to only borrow a small amount
When it comes to business loans, there’s a general rule: the larger the sum of money borrowed, the more you have to repay. This is where microloans are helpful for small to medium enterprises, as they generally do not require the six-figure loan that a larger enterprise may need.
Specific types of businesses can also benefit from microfinance loans
Did you know that traditionally, microloans were designed to give impoverished people, especially in developing nations, a helping hand by offering small loans? Microloans are still available for those who need them most, sometimes on a not-for-profit basis, however they are also offered to specific types of businesses, including those founded by women or minorities. Additionally, businesses operating in specific geographic areas or developing countries can also benefit from not-for-profit microloans.
How to apply for a microloan
If you think a microloan is the ideal solution for your small business or startup, then you can begin the quick and easy online application process today. Before you apply though, it’s important to ensure you meet all of the lender’s requirements first.
We also recommend that you do your initial research to determine which lender you wish to work with. Remember, each lender is different, so you’ll want to find the best lender that suits your circumstances.
Things to keep in mind when applying for a small business microloan
As we mentioned above, there’s a number of things you’ll want to take into consideration before you apply for a microloan.
Firstly, business microloans often have higher interest rates as they pose a greater risk to the lender. This is because they usually don’t require collateral or a decent credit rating in order to apply.
Secondly, business microloans must be directly related to the growth of the business, and can’t be used for other purposes such as to purchase real estate or for personal use. Lenders will discuss these limitations when discussing your loan application.
Lastly, you should always discuss business financing options with a trusted financial professional before you decide whether or not it is right for your business.
Have you ever utilised a microloan for your small business? How did the funding help you? We’d love to hear about your experiences in the comments below.