The Pros and Cons of Microloans

Getting funding can be one of the biggest obstacles for entrepreneurs. One option that has benefited many small business owners is microfinancing, when a relatively small amount of money is acquired from investors.

While this may not be a good choice for individuals who need major financial backing, it is ideal for many startups or businesses that need less than a traditional bank would typically lend. Here are the basics of the microloan process and how you can get one.

How It Works

According to “Inc.,” this program offers small business owners up to $35,000 to cover capital expenses, but that amount could increase to $50,000 in the near future. The average amount entrepreneurs receive for a short-term loan is $13,000. It’s mainly geared toward newer businesses in the startup stage or those that have generated some revenue but need further capital for continued growth.

The Pros of the Microloan Process

When compared to a traditional loan, this tends to be easier to obtain if you have a less than stellar credit report or you’re young and don’t have much of a credit history. Even in the event you have absolutely no credit score, there is the option of a credit builder loan that allows you to establish credit. A great thing about microlenders is that many will help guide you through the initial stages and offer advice to increase your likelihood of success. Another advantage is it’s hard to get completely in over your head with a microloan because you’re not borrowing an excessive amount of money. In a worst case scenario, in which your business tanks, it shouldn’t wreck your financial future.

The Cons of the Microloan Process

In terms of drawbacks, the biggest is probably the inflated interest involved. This type of loan will usually cost more than you would pay through a bank, but it’s still less than paying with credit cards. The other issue is you may not be able to get as much funding as you need. Because the average amount of $13,000 will only cover so much, you may find yourself needing additional funding to truly get a business off the ground.

Eligibility Requirements for Applicants

Although some microloans only require applicants to be 18 years of age, many are only given to individuals who are 21 or older. If you’re part of a startup, you will need a business plan that outlines your intentions and what actions you will take to generate revenue. The more professional and in depth this is, the better odds you have of being approved. For established businesses, it’s necessary to have some form of accounting records showing how much cash flow you have coming in. Otherwise, you will need to prove you have existing income so lenders can be assured they will see a return.

Getting a Microloan

The SBA has a list of intermediary lenders you must apply with in order to obtain a microloan. Browsing through this list will break lenders down according to state and provide all the necessary contact information to get you started. You may be required to complete some training before you are taken into consideration as a legitimate applicant. When it comes to repayment, you are given a maximum of six years. Remember, the most professional applicants are the ones who are likely to receive funding, so it’s important to do your research and be able to answer any questions a lender may have.

Capitalizing on microfinance has helped countless entrepreneurs turn their visions into reality. If you qualify and go through the necessary steps, you can get your business up and running too. With a little insight from experienced lenders, you should be able to pay back your loan and lay the foundations for a successful company.