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Microloans: What Are They And Would You Benefit From One?

microloans

As a small business owner building your company from the ground up, you will most likely need some financial assistance getting the ball rolling. However, finding a bank to loan you the necessary money to expand your company can be challenging, especially if you've never borrowed from a bank before.

If you're having a hard time getting investors or bankers interested in your small business, this is where microloans come in handy. You may have heard of them - they're short-term loans that usually fall under $50,000. However, before you apply for a microloan, it's important that you understand the ins and outs so you know what you're getting your business into.

What exactly are microloans?

According to the Small Business Association, the average microloan is around $13,000 and is provided for working capital for small businesses. Many companies also use this type of loan for expenses like inventory, equipment, furniture or supplies.

Microloans also have a maximum term of six years. Other than the duration and and the size of the loans, a big difference between microloans and traditional small business loans is that they're a lot easier to obtain by business owners without much experience applying for loans. While lenders may have specific business types in mind, such as veteran-owned business and environmentally responsible companies, anyone can apply for a microloan.

How do you get one?

Before you apply for a microloan, you have to establish a business plan. Your lender will want to make sure you're dedicated to growing your business by showing that you've done the proper research and learned about your company's market. Having a concrete plan for success will provide evidence that you will eventually be able to repay your loan. Prior to the application process, it's also smart to make sure that your credit score is in good shape.

Once you're accepted for a loan, lenders usually require you to provide collateral like inventory and to personally guarantee the loan. Once you know the interest rates, make sure that you will be able to make these payments - you often owe more interest for microloans than you do for a standard bank loan. 

Would your business benefit from one?

To determine whether your company will benefit from a microloan, ask yourself these questions to see if it's right for your small business: Do you need to borrow less money than is generally provided by bank loans? Is your business fairly new with a short credit history? How long has it been since you've been accepted for a bank loan? Determining your answers to these questions will make it clearer whether a microloan is what your company needs. 

Microloans are perfect for young business owners who don't have much of a credit history yet or for those who simply wish that their credit report was more impressive. It's going to be very difficult to get approved for a traditional loan if these issues apply to you. 

Keep in mind that it's not always best to borrow a large amount of money during the early stages of your company's progress. Small business owners who borrow an excessive amount of money while their companies are still in the early stages of development may end up getting in over their heads and creating a debt that wrecks havoc on their financial futures if their companies don't take off like they were hoping they would.

Most microlenders will provide guidance for business owners to ensure they're on the path to success. In addition to this extra support, microloans are ideal for providing you with the small business funding needs required to getting your company moving forward.

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