Do You Qualify for a Microloan for Your Business?
When running a small enterprise on a tight budget, borrowing even several hundred dollars will make a big difference between settling your business bills or not. However, many traditional lending institutions do not consider loans that are below five figures.
Fortunately, there are other lending institutions in the market willing to give microloans to small businesses. If you require quick cash for your business, this guide will help you determine if a microloan is a good solution for you.
What is a microloan, and how does it work?
A microloan is a type of loan offered on a short-term basis. Microloans usually amount to a maximum of $50,000 in the United States. However, you are not limited to the minimum amount that you can borrow.
Many lending organizations that are part of the US small business administration (SBA) offer microloans on reasonable interest rates, usually ranging from 12% to 18%. They aim to support small businesses with start-up capital or solve cash flow problems with the aim of growing such businesses. According to Lantern Credit, there was an average of $14,735 business microloans in FY2019.
The SBA usually offers loans to non-profit organizations that lend the money to small businesses. Besides, SBA sets regulations like the maximum loan limit and the repayment period. In this case, a microloan has a maximum loan term of 6 years.
Other SBA guidelines include the restriction of using microloans to repay other existing loans, real estate purchasing, and the need to try securing a loan from other private lenders before resorting to microloans.
Who should consider getting a microloan?
As previously mentioned, business microloans are fit for small businesses, either at the start-up level or those who want to grow. Hence, anyone who wishes to get a loan for their small business, especially if they can't secure a loan from other private sources, can consider getting a microloan.
Any individual that needs to start a business immediately but does not have adequate credit to qualify for a loan elsewhere can take a microloan. Unlike traditional lenders with many requirements to be eligible for a loan, microloans are easy to secure with a few regulations.
Additionally, small businesses owned by disadvantaged communities or females or any other minority group can consider microloans. It is a priority for microloan lenders to support such groups.
How do you qualify for a microloan?
Like any other lending institution, microfinance institutions and small business lenders that offer microloans have their set of requirements to qualify for the loan.
Generally, if you're an entrepreneur with limited capital, a small business with low credit, or a disadvantaged group, you can consider microloans.
Your qualifications for a microloan will depend on the following factors:
- Availability of a comprehensive business plan (for start-up businesses)
- The length of time your business has been operating
- Availability of some collateral or a loan guarantee
- The loan amount that you require
- The location of your business
- Your long-term goals
Microlenders will see you qualified mainly depending on your overall goal, background, and business goals. Other factors like a good credit score do not matter a lot as the lenders' goal is to support small businesses' vision.
In conclusion
A microloan can be the savior for financially limited beginner entrepreneurs and small businesses that cannot qualify for traditional loans. It can keep your enterprise steady through the downs and ups of the business cycle.
A little amount of cash at the appropriate time can make a significant difference in your business.
