As the name suggests, a microloan is a small term loan (between $5,000 and $50,000). It is typically used by small businesses that are in the early stages of growth for things like inventory, office supplies, equipment, machines and other business supplies. Other businesses seek a microloan because they need to boost working capital.
Another benefit of applying for a microloan is that even business owners with poor or no credit can secure the funds they need. Those with not enough collateral or cash flow can secure a microloan as well. Many businesses struggle to secure financing because they only need a small amount. While that may sound strange, banks typically prefer to lend large amounts to big businesses. Microloans provide a solution for small businesses that need smaller amounts of capital.
Is a Microloan a better option?
There are many alternative lending options available nowadays, but not all are created equal. Some financing promises quick cash, yet pushes the business into a dangerous cash-flow situation. Many also fail to fully disclose the real fees and costs behind the product. Consider the business owner who paid $60,000 for a $45,000 loan: $15,000 in interest after 30 days.
Microloans are continuing to grow in popularity because small business owners are not seeking access to millions; they simply want to get on their feet or purchase new equipment to keep up with growth. They need a small amount with an affordable interest rate. For this reason, more and more entrepreneurs are turning to merchant loans.
How can your business qualify for a microloan?
Before you apply, make sure the lender you are choosing has years of experience in helping small businesses. You should also make sure you understand all fees and costs involved. Once you have chosen the alternative lender you would like to work with, you will be asked to provide certain information about your business. Depending on the lender, you might be asked to answer:
- How long your business has been in operation
- Your business’ location
- The amount requested
- And your financial track record
The bottom line: microloans are intended to help people. Vincent McCoy, director at Inland Empire Small Business Development Center, says that many of the businesses that take advantage of a microloan program and started small have great success stories.
“A small amount of money may be just the right amount,” he says. “That’s one of the ideas behind helping people is to go from being non-bankable to bankable.”
Author Bio: As an account executive, Michael Hollis has funded millions by using alternative funding solutions. His experience and extensive knowledge of the industry has made him a merchant loans expert at First American Merchant.