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Business microloans explained
Are small expenses holding back your business? A microloan might be able to help.
Small business owners know that taking out a $75,000 loan isn’t always the best way to pay for something as minimal as a broken oven. Still, you might need that financing to get your business up and running again.
This is where microloans come in. We take you through what a microloan is, who they’re best for and where you might find one.
What is a microloan?
A microloan is what it sounds like: a small loan. Business microloans are typically around $500 or more and designed to help out businesses that need a small amount of money. They’re a good option for startups and businesses in underdeveloped areas, which typically don’t need a lot of capital but might have trouble finding financing.
Microloans often come with shorter terms and higher interest rates than other forms of business financing. But many require a personal guarantee from one of your business’s owners.
And they’re not always available through traditional channels like banks, which prefer to hand out larger, more profitable loans. The upside is a lot of microloan options are available for business owners with poor credit or little financial history.
Minority-, women- and veteran-run businesses might be able to find microloans with more favorable terms through programs designed to encourage entrepreneurship in these communities.
Microloans can be a solid way to pay for…
- Inventory and supplies.
- Equipment or furniture.
- Small building improvements.
Which business lenders offer microloans?
Here are three options to consider if you’re looking for an online microloan.
Varies by location and loan type, but you must:
Your business hasn’t filed for chapter 7 bankruptcy in the past two years or for chapter 12 bankruptcy in the past year.
Depends on your business and loan type.
Your business must use PayPal to receive payments from customers.
Up to 25% of your annual PayPal sales but no more than $97,000 for first-time borrowers.
PayPal withdraws a percentage of your daily sales until your loan is paid off.
How do I know if a microloan is right for my business?
Consider a microloan if:
Consider other options if:
- You have an established business that could easily qualify for less costly loans.
- You need more than $50,000.
- You’re looking for continual access to financing — like a line of credit.
- You’re looking for a long-term loan to pay back over a period of years.
Getting an SBA microloan from an intermediary lender
Government-backed microloans are available through intermediaries — or nonprofit organizations with experience in lending and technical assistance. These loans are a lot like other SBA loans, but they come in smaller amounts, have shorter loan terms and aren’t available through most business lenders.
Similar to traditional SBA loans, SBA microloans tend to have lower interest rates and more favorable terms than the competition. They’re also more difficult to qualify for.
SBA microloans tend come in amounts of up to $50,000 with terms of up to 6 years. To qualify, your business must:
- Be a for-profit business.
- Primarily operate in the US.
- Be independently owned and operated.
- Be supported by investors to some extent.
- Prove it doesn’t qualify for other financing.
What is an MFI loan?
Microfinance institutions (MFIs) are nonprofit financial organizations that specialize in helping communities that have no access to traditional financing. Usually, you can borrow up to $10,000 at APRs around 15% to 30%. Some lenders like Kiva offer partially crowdfunded loans that don’t charge any interest at all.
Most MFIs only offer business loans for entrepreneurs, though it might be possible to find personal loans as well. MFI loans are also sometimes referred to as microloans. Some lenders refer to microfinance institution (MFI) loans as microloans.
Most MFIs in the US require you to use the funds for business purposes since personal loans are uncommon. Many lenders also focus on funding women, minorities, veterans and low-income borrowers, though anyone can apply. You generally don’t need to meet any credit or income requirements to qualify.
Five tips for successfully applying for a microloan
Increase your chances of approval by following these easy tips for success:
- Make sure you’re eligible. Do this before you apply for a loan to avoid wasting your time on something you can’t get.
- Prepare your documents. Gather required records and information you’ll need to fill out your application to ensure things go smoothly.
- Know your finances. Have a clear idea of how much you need, the payments you can afford and how long it will take you to pay it off.
- Shop around. You won’t know if there’s a microloan that’s perfect for your business unless you compare your options.
- Look locally. SBA microloan intermediaries tend to be local. And you might find nonprofits offering other types of financing designed to help businesses like yours.
Microloans can have higher interest rates and shorter terms than other types of lending. But if your business needs to cover only small expenses, they could be a better overall deal.
If you’re not looking for a small loan to get ahead in your business, you might want to look elsewhere for financing. And before signing any contract, compare your options to make sure you have the best one for your business needs.
Frequently asked questions
What’s the average amount I can get with an SBA microloan?
Business owners borrow an average of $13,000 when they take out an SBA microloan.
Will I need collateral to get a microloan?
It depends on your lender, but some microloan lenders require collateral. If you’re concerned about finding collateral, consider a microloan through a peer-to-peer platform.
Collateral isn’t necessarily a bad thing, though — loans secured with collateral tend to attract more favorable rates, fees and terms.
Are microloans the same as microcredit?
They can be the same thing. Some lenders use the terms interchangeably while others use “microcredit” more loosely to refer to a variety of business lending products. What’s more important is finding financing with the best rates and terms for your business.
Can I use a microloan for any purpose?
No. Most microloan lenders want to know what you’re using the funds for. And they can restrict financing depending on that use.
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