A microloan is a small term loan that ranges between $5,000 and $50,000 and can be used by small businesses for different purposes. Small businesses often use micro loans to cater to their cash flow needs, including paying for inventory, machines, office and business supplies and equipment, working capital.
Micro loans interest rate is generally low, providing borrowers with a relatively more affordable borrowing option. These loans are usually provided by small-business-friendly lending organizations such as banks or credit unions that work with the U.S. Small Business Administration (SBA).
Microloans are majorly designed for small businesses. However, they come with some restrictions and limitations that can sometimes hinder small businesses from getting them. In 2009, the SBA started a microloan program under President Barack Obama’s administration with the purpose of enabling small businesses to get loans between $500 and $50,000. The program has provided tens of thousands of loans to different small business owners to start a new business or expand an existing one.
There are several reasons for needing a microloan and some of them are highlighted as follows:
Not enough collateral to get a loan from a bank
Not enough cash flow to reliably make monthly loan payments
Poor Credit history or credit score
Relatively Small loan amounts that are not very profitable for banks
A microloan is often used by early-stage startup businesses or other small businesses and below is how microloans work in a nutshell:
Find a microloan provider approved by the SBA
Do some research to ensure their business nature and background
Apply for a loan
Factors lenders consider before providing a microloan include:
How long has the business been in operation
The amount requested
The location of the business
Borrower’s financial track record
The likelihood of repayment within the given time frame
With the features and benefits of microloans, it is not surprising that small businesses are using the financial tool to meet their cash flow needs.
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