According to the United States Small Business Administration, a microloan is any loan that is less than $50,000. While this amount may seem small, micro-lending financing comes with a variety of benefits for small businesses.
In this article, we’ll take a closer look at this loan option including how it works as well as its advantages and disadvantages.
Micro-Lending Financing Explained
The structure of micro-lending financing is similar to a typical term loan. The lender will review and approve your application and extend a loan offer with specific terms and conditions. If accepted, you pay the loan back with interest based on the terms of the agreement. Also, like traditional loans, microloans have fees and penalties attached.
This type of lending is different from traditional lending because it involves smaller amounts. Additionally, the micro-lending financing arena is not dominated by traditional financial institutions. Instead, most loans are made through P2P lending platforms. If you receive a microloan through a P2P platform, the funds likely came from several investors.
Advantages and Disadvantages of Micro-Lending Financing
Microloans have advantages and disadvantages, just like traditional financing options.
Advantages
The advantages of microloans are:
Qualification criteria are more lenient
While qualification criteria vary from one lender to another, it’s typically more lenient than traditional loan qualification requirements. You will still likely be asked for personal and business financial information, as well as to provide collateral and a personal guarantee.
However, since the loan amounts are smaller, the value of the collateral can be lower as well. For example, most of the time, the collateral must be 80% of the loan amount- so on a $10,000 loan, your collateral must be worth $8,000.
Can be used on a variety of expenses
Microloans can be used on a variety of things, including:
- Supplies
- Equipment
- Working capital
- Inventory
- Materials
However, it’s important to note that lenders may put restrictions on how you can use the funds, so check with them before accepting the loan offer.
Lender Options
Micro-lending financing is not available through all lenders, but there are plenty of options:
- Traditional financial institutions
- Alternative lenders
- Non-profits
- P2P lending platforms
- Government entities
Each lender has its own advantages and disadvantages, but the variety of lender options is one of the advantages of micro-lending financing.
Disadvantages
The disadvantages of microloans are as follows:
Smaller loan amounts
One of the major disadvantages of microloans is the size of the loans, which are not enough for many businesses. While the loans can go up to $50,000, a loan this size is hard to secure. In fact, borrowers can only obtain more than $20,000 if they are unable to obtain credit elsewhere and they are likely to succeed. If you need more funds, it may be better to seek traditional financing.
Higher Interest Rates
The interest rates on microloans are not always higher, unless the borrower has a bad credit score. In fact, even top-rated borrowers will pay at least 6% and risky borrowers will pay up to 31.9%.
Not available in all areas
While it is increasing in popularity, micro-lending financing is not available on the mainstream market yet. You may have a difficult time finding microlenders in some areas.
Will Micro-Lending Financing Help Your Business?
If you need a small amount of funding, microlending may help. However, you may want to weigh your options because some of the alternatives may be better. If you’ve done your research and still believe that microlending will help, contact Artis Commercial Capital to learn more.