Microloans are a financing category where you can qualify for short-term working capital with a low interest in case you meet special requirements.
If you want to finance your small business idea, emergency repairs to the business you already have or buy new equipment to develop further, microloans are the best choice for you. If you are from Australia and need to find the best business loans in Australia, you can read the reviews to save your time.
Why would you take a traditional bank loan if you can qualify for a small business loan, whose interest rate is much lower?
What are Microloans?
The U.S. Small Business Administration defines microloans as small loans, the amount of which is around 13,000 U.S. dollars. Yet, microloans are not that small in the reality. Their loan amount can range from 5,000 to 50,000 U.S. dollars. The lenders that give microloans are mostly non-profit organizations.
Who Needs Microloans?
If you need extra cash for your business, the first thought is to go to the bank. Yet, every small business owner who tried to get a loan from a bank knows how hard it is: only 1 out of 5 applicants gets an approval.
These are the main reasons:
- Your business isn't well established
It doesn't mean that your business idea is bad. When extending loans, the banks want the safest bets possible. If your history of turning profits is short, it will be too risky for them to cooperate with you.
- You aren’t applying for a million dollars
Banks tend to give large amounts (half a million or even more) to have large returns on investment. But if you need a small sum, you will probably get rejected. Microloans are more suitable for small business owners.
- Your credit is not the best one
To get a bank loan, you need a good credit history. If you take out a loan for the first time or had problems with credit, it's a huge minus.
Microloans have other criteria to decide whether you qualify or not. They can be a glimmer of hope for small business owners who are starting their business, need a relatively small sum, and don't have a perfect credit history.
Who Can Qualify?
The requirements vary from lender to lender, but generally, any registered business may get a microloan. There is no 100% guarantee of approval. If your credit score is low, you may have some problems. If your company is environmentally-conscious or it enters a certain industry, it can increase your chances of getting a microloan.
How To Apply for Microloans
The process of application consists of 4 steps plus extra details that depend on the kind of your business.
1. Prepare a finalized business plan
Business doesn't exist without a business plan. It outlines your business goals, how you'll extend the customer base, the vision of your business future and other essential details.
Remember that giving microloans is not a free service. Lenders expect you to return the borrowed sum plus the interest rate and monthly fees. Your business plan demonstrates how strong your business model is and how serious your intentions are.
2. Understand your credit scores
Try your best to clean up your business and personal scores before applying for a loan. The higher your credit score, the lower your interest rates will be.
Credit reporting bureaus can help check your personal credit and get an annual credit report for free. If your report contains some mistakes, turn to the credit bureau to correct them.
3. Assemble your collateral and/or personal guarantee
Generally, lenders require microloans to be backed by a collateral, and/or a personal guarantee, instead of a stable credit history. In such case, collateral will be a personal property, such as car or home.
But if you are starting up your business, the value of your asset is not equal to the loan amount. In this case, a lender requires a personal guarantee: a part of your future savings or other assets for loan repayment. If your goal is to take out a microloan for starting or improving your business, there will be no problems with repayment.
4. Prepare your own funds for investment
When giving you a loan, lenders want to see your effort and monetary commitment. That's why the level of your income and personal savings will influence your ability to get an approval. Be ready to prepare company balance sheets and income tax returns.
Microloans are the best way to get a financial help for developing your business. Banks are not always willing to give microloans to small business owners. When applying through alternative lenders, you have more chances to get an approval. Read the reviews of the microloans lenders and make a right choice to make your business prosper!