Microloans are best suited for small business owners or startups that have a thin credit file or can’t secure funds through a traditional bank. Microlenders are non-profit organizations that offer smaller loan sizes, which max out at $50,000 but tend to average much less than that. They charge slightly higher rates than big banks, but have less stringent underwriting criteria. Microlenders will typically mentor you through the application process, which is a big plus. Their goal is to help you build your credit and financial history, so you can eventually qualify for bank funding.
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What You Need to Know About Microloans
|Reasonable interest rates (12-18%)||Limited to businesses with 5 or less employees|
|Favorable repayment terms||Small loan amount, average $6,000|
|Great way to establish business credit||Requires lengthy documentation|
|Available for many uses||Past credit issues can still disqualify you|
|May receive mentorship from lender||You may have to take a business training class|
|Collateral usually not required|
Best Uses for Microloans:
- Working capital
- Start up funding
- Leasing commercial space
- Hire employees
- Pay for equipment
If you meet the business-size criteria and can’t get a bank loan, go for it! The interest rates charged are reasonable when compared to other alternative financing options. Plus, the mentorship you receive make sure you use the capital wisely. Microloans are also a great way to start establishing stronger business credit by making your payments on time.