One of the great ironies of small business financing is that the less money you need to borrow, the harder it can be to get. If you’re seeking less than $50,000 in capital, a microloan may be worth considering.
What Is a Microloan?
Although the definition of a microloan may vary depending on the organization making the microloan, in general, microloans share these characteristics:
- Very small loans ($500-$50,000)
- Short-term loans
- Designed for businesses with little or no credit history, low-cost startup businesses, sole proprietors or businesses with very few employees
Microloans can be used for many purposes, including working capital, inventory, fixtures/furnishings and equipment or machinery for your business, among other things. Some microloan organizations are set up to help under-resourced populations, including minorities, women or companies providing employment in underserved areas.
Pros and Cons of Microloans
A primary benefit of microloans is that they may allow business owners to get smaller amounts of financing than most banks can offer. On the other hand, the interest rate for microloans may be higher than the rates offered by banks for larger loans.
One side benefit of some microloans is that microlenders may provide additional assistance along with the loan. In fact, some microlenders require you to take courses in topics such as business plan writing, accounting, marketing, and other business basics as part of the application process.
Where to Get Microloans
There are many microlenders focusing on specific states, regions or communities. Your local municipality, Chamber of Commerce, economic development organization, SCORE office, SBA district office or Small Business Development Center (SBDC) can also help you find microloan sources.
How to Get a Microloan
Even though obtaining a microloan is generally easier than getting approved for a traditional bank loan, you’ll still need to do the following.
As with any other loan application, write a business plan. Lenders like to see what you plan to do with the money as well as your future plans for your business.
You should also get your credit report and make sure there are no errors on it. If your personal credit rating isn’t top-notch, take steps to boost it before applying for a microloan.
Put skin in the game: Microlenders often expect you to invest your own money in your business, even if it’s a nominal amount. Some also expect you to get financing from friends and family before applying for a loan. Also, be prepared to put up collateral or offer a personal guarantee.
By taking steps to investigate your microloan options, you can make an informed decision about whether a microloan is right for your business.