A microloan is a small term loan that ranges between $5,000 and $50,000 and can be used by a small business in its early stages to pay for inventory, machines, office and business supplies and equipment, working capital.
In 2009, the SBA started a microloan program under President Barack Obama’s administration, enabling small businesses to get as much as $50,000 in loan. Over the years, the program has provided tens of thousands of loans to different small business owners to help them start a new business or expand an existing one.
Why Businesses need micro loans
Small business owners have been turned down by banks when applying for a traditional loan for different reasons and ultimately look for ways on how micro loans work. Many of the factors leading to being turned down by banks double as the reasons for going for micro loans. Some of these reasons are briefly highlighted as follows:
- Not enough collateral
- Inadequate cash flow
- Credit history or credit score
- Small loan amounts
- Greater risks for banks
Factors considered by lenders before providing a microloan
Lending institutions take some factors into consideration before providing borrowers micro loans. Some of these factors include
- How long the business has been in operation
- The amount requested
- The location of the business
- The financial track record of the borrower
- The estimated likelihood of the business repaying the loan within the given time frame
Pros of Micro Loans
- A microloan is a good option for small businesses that do not need a large amount of money
- The requirements for a microloan provided by a lender are more flexible than those of a proper bank.
- Lenders sometimes offer technical support, guidance through the loan process.
- The interest rate of a microloan is less than that of a credit card
Cons of Micro Loans
- The loan amount may be limited as lenders depend on government guarantees, donations, endowments or contributions.
- Qualifying for a microloan varies from lender to lender and their requirements may vary.
- The annual interest rates for a microloan are usually higher when compared to the annual interest rates for a traditional loan or an SBA loan.
There are several other financing options available to small business owners who do not find micro loans suitable.