In order to help small startups and entrepreneurs who often have trouble accessing capital, the Small Business Administration (SBA) created the microloan program. Through this program, the SBA gives funds to local non-profit community-based organizations. These organizations in turn offer microloans to small businesses. While this is the perfect funding solution for many business owners, it isn’t right for everyone.
Wondering if a microloan is right for you? Here are seven signs you should consider a microloan:
1. You want a small loan.
Microloans, as suggested by their name, are small by design. All microloans are for less than $50,000, and the average loan is $13,000. If that’s the range you’re looking for then a microloan may be the perfect funding solution for you, but if you need more cash, you may want to explore other options or combine a microloan with a line of credit or another type of funding.
2. You are willing to do some business training.
The role of the microloan program is not just to get cash into the hands of entrepreneurs. It is also designed to be a business development and mentorship program. As a result, in some cases, if you apply for a microloan, you may also be required to do some business training or planning before the loan is funded.
If you feel on-course with your objectives and you don’t want to spend time training, you may want to explore alternative funding options. Keep in mind, however, that training or development is not required with every microloan, so check with the lenders in your area before you discount these loans for that reason alone. In other cases, the development, training and mentorship opportunities may be exactly why a microloan is right for you.
3. You don’t plan to consolidate debt or purchase property.
Microloans can be used for almost any aspect of running your business. If you’re launching a new marketing campaign, buying equipment for your restaurant, restocking inventory for the busy season or just needing to top off your operating capital, a microloan may be able to help. However, there are two major limitations on these loans: they cannot be used for debt consolidation or to purchase property.
Again, if those are your objectives, it may be time to explore alternatives such as traditional business loans from banks or credit unions, venture capital funding, cashing out personal investments such as 401ks or lines of credit from fintech companies.
4. You are willing to put up collateral.
Some participants in the microloan program are able to take out loans that don’t require any collateral, but in many cases, microlenders require collateral to secure at least a portion of the loan. Collateral requirements vary, but collateral may range from personal property to inventory to vehicles to property deeds.
You don’t necessarily need to use the items you purchase with the loan as collateral. Rather, you can often use assets that you or your business already owns. If you don’t have collateral or if you are not willing to risk personal property for a business loan, you may want to explore collateral-free lines of credit or even credit cards.
5. You are trying to avoid credit card debt.
Many small business owners turn to credit cards to fund their small businesses, and while this works in some cases, in other cases, it locks business owners into debt for decades. A microloan offers a viable alternative to credit card debt.
Most microloans charge rates between 8 and 13 percent, significantly lower than most credit cards, which can have penalty APRs up to 33 percent or even higher when late fees or over-the-limit fees are taken into account. Additionally, microloans have sustainable repayment terms, and the longest term on these loans is typically six years. Credit cards, in contrast, allow cardholders to pay only the monthly minimum payment, which can translate into a debt hanging over your head for decades.
6. You run a for-profit business.
The microloan program is designed for for-profit businesses. If you need a loan for a cooperative, a nonprofit organization or similar entity, explore other funding avenues. Microloan programs only grant funding to for-profit businesses and select not-for-profit childcare centers.
7. You don’t have perfect credit.
Traditional banks only approve 20 to 36 percent of business loans. This makes accessing funding challenging for everyone, but especially challenging for business owners who don’t have perfect credit. Recent surveys indicate that over a third of business owners claim that it is harder to get funding now than it was in the past. Without the funding that they need, many small businesses don’t expand or hire new people, and a fifth of them consider closing their doors.
If you have less than perfect credit and you have struggled to get a business loan from a bank, you are not alone. In fact, you are with the majority of small business owners. Part of the purpose behind the microloan program is to bridge this gap, making funding accessible to more businesses, in spite of limitations like blemishes on your credit report.
The microloan program helps entrepreneurs access capital and even extra training in some cases. If the above seven criteria describe your situation, you may want to apply for a microloan. However, if this list doesn’t apply to you, another product may be better suited to fund your business endeavors.