Recent years have seen a rise in the popularity of microloans as an essential financial tool, particularly for people and small businesses in need of modest financial support. We will examine What is a Micro Loan, its operation, and its relevance in the current financial environment.
What is a Micro Loan?
As the name implies, a microloan is a small loan, typically of less than $50,000, designed to assist startups, independent contractors, or small enterprises with a small staff in meeting their operating costs. Because micro loans have shorter payback periods than conventional small business loans, the interest rates on them may be higher to compensate the lender for their lost investment. Although the exact amount depends on your needs, a micro loan of $13,000 is typically granted.
Rather than applying for a traditional loan from a lender such as a bank or credit union, borrowers are connected with individuals or smaller financial services companies that lend out small sums of money, as micro-lenders are typically individuals. Many of these microlenders are drawn to particular kinds of startups or businesses, particularly those with philanthropic or social objectives, such as nonprofit organizations.
What Do You Need to Qualify For a Micro Loan?
- Average or better business and personal credit: You may be pleased to learn that you can apply for a microloan without having to have perfect credit. An average credit score from both your personal and business credit will be accepted by many lenders. It’s a good idea to learn how to build business credit if your credit is bad or nonexistent.
- Collateral and/or personal guarantee: Microloans are typically granted to less established, riskier organizations, so you may be required to provide collateral or a personal guarantee for repayment. This could include personal assets such as your home or vehicle, as well as tools used for business purposes.
- Business History: While some micro loans are intended for startups or aspiring business owners, others will demand documentation of at least some prior business experience. Particularly for the SBA-backed micro loans, you will most likely need to provide proof of your business existence for the last two years in the form of your tax returns. You might also wish to submit a business plan or some other documentation of your yearly income.
How micro-loans differ from payday loans
Payday loans are intended for borrowers who need quick fixes for financial issues (though it’s unlikely that they will do this). Particularly for people who are funding their entrepreneurship, microloans are available.
The target market for each of these products varies. Payday loans are intended for people who need to cover an unforeseen expense and are employed or have a regular monthly income. Microloans are intended for business owners who wish to invest in a particular expense for their startup.
Keep in mind that payday loans will always have extremely unfavorable terms for repayment. Interest rates can reach hundreds of percent, which means you will have to repay much more than you originally borrowed. Microloans have affordable interest rates and frequently come with a multi-month repayment break at first.
Micro Loan vs. Business Credit Card
| Microloan | Business Credit Card |
| Up to $50,000 | The limit depends on the card and your qualifications but the average is about $56,000 |
| One-time lump sum payment | Revolving credit that you can return to after making payments |
| Interest rates from 6% to 30% | Annual percentage rate (APR) of 0% to 24% |
| Repayment terms are short, and the monthly payment is high but steady. | Only pay interest on what you spend but the monthly payment will vary based on what you use |
| Can qualify with an average credit score | May be able to qualify with a lower credit score or no credit history |
| Six to nine months before funding | Can access funding immediately |
| May get business coaching or other training | Rewards, points, cash back or other perks |
| May require collateral or personal guarantee | No collateral or a personal guarantee |
Conclusion
What is a Micro Loan, With typical amounts under $50,000, microloans provide essential financial support, particularly for startups and small businesses. They are not like payday loans in that they are intended for business expenses and have flexible repayment terms along with affordable interest rates. Microloans are a smart option for start-up businesses because they have lower interest rates and can require collateral, but they also offer a lump sum with fixed payments, unlike business credit cards.