How Microloans Work

There are multiple reasons why business owners look for small business loans online including business expansion or the purchase of new equipment. Furthermore, there are multiple types of lending options that are available depending on the needs. One such option is a microloan.  

Consider the example of a small business that is seeking to raise funds quickly. The business wants to invest a small amount of money in purchasing some new equipment. In such a case, instead of going to a large bank and engaging in a drawn-out application process, it would be more appropriate for the business to opt for a microloan. Read on to explore the benefits of this loan type and why it can be an attractive financing vehicle.

The Terms

Microloans tend to be smaller in terms of amounts, but they do have a great deal of utility for small businesses. 

These loans often come with excellent terms for borrowers, especially when they are provided by a non-profit organization or for-profit loans backed by the SBA (Small Business Administration). These organizations seek to help small businesses gain a foothold in local communities to stimulate economies and provide jobs. Therefore, they offer lower interest rates to encourage borrowers and sometimes even offer interest-free loans for a period of time. 

Peer-to-peer (P2P) lending platforms also offer the ability to apply for a smaller loan amount, matching interested individual lenders with borrowers who need cash. The terms for this form of lending are not as stringent as those laid out by banks. In most cases, there is no collateral involved, however, the interest rates that are charged in this case can be significantly higher.

When A Business Would Consider A Microloan

There are a number of cases where a small business may consider this form of financing. 

Banks tend to have minimum thresholds in terms of the amount that must be borrowed, which is not necessarily applicable for businesses seeking smaller amounts. If a small business does not qualify based on these thresholds, a microloan might be more appropriate. 

A low credit score may make it harder to get business loans for bad credit and raise funds from banks. In this case, microloans could prove to be the right fit. 

Comparing To Online Lenders

It is important for business owners to compare the key features of microloans with online lenders. Here are the key characteristics worth considering: 

• Online lenders of traditional business loans tend to have an elongated application process, while these much smaller loans can be processed quickly
• Online lenders issuing business loans may require guarantees or collateral. This is not the case for most microloans
• Online loans tend to require a much higher credit score compared to these loans that are often administered by non-profit organizations 

Comparing To Banks

Traditional business loans from banks also differ greatly from microloans. Here are the basic differences:

Banks may need loan sizes to meet a minimum threshold which may exceed the amount your business requires at present. Whereas, a smaller loan will suit your business plan and not saddle you with extra debt
Specialized, smaller business loans can be funded by various lenders at the same time. Conversely, bank loans are typically funded by a single bank

The Steps Of Getting A Microloan

There are three major steps that you need to follow in order to secure a microloan. These steps include the following:

1. You need to register for a small business loan from an organization or platform that connects you with the lenders. Registration typically requires you to furnish a few basic details about your business.
2. The next step is to make a detailed application of your funding needs. You need to list out the amount, the purpose, as well as the potential repayment schedule that you are seeking.
3. The final step involves receiving approval from a single lender or a group of lenders. Once the loan is approved, you need to furnish additional documents such as credit scores and financial statements. The lender may also choose to implement a repayment schedule based on invoice factoring.

Conclusion

Microloans could prove to be highly beneficial for small business owners, especially those that need only a small amount for specific start-up or growth costs. These loans allow you to borrow small amounts without pledging collateral. 

If you fit the criteria whereby an organization is willing to fund your growth because you are aligned with their mission, these loans and accompanying advantageous terms will empower you to fund growth.