Obtaining a loan for your small business may be hectic. When the bank or financial institution has denied you a loan for your business, a microloan can be the best option for the type of funding you need. This micro-lending guide has all the information you may need.
What Is Microloan for Business and How Does It Work?
These are short-term loans usually extended to new startups with low capital needs or self-employed individuals. They have low-interest rates and may thus be a great solution to encourage economic growth and entrepreneurship for developing nations.
Microloans involve two parties: the lender and the borrower. It’s a mutual relationship since the former earns from interest rates while the latter has the business funded. Therefore, the borrower searches for a reliable lender and lays down the financial needs of his business. The lender evaluates the validities of the borrower’s request and meets them, focusing on some agreed terms and conditions.
What Are Micro Loans Used For?
Apart from serving as working capital for the small business, borrowers can as well use the loans for:
- Purchasing inventory
- Paying the wages of employees
- Purchasing or servicing machines
- Buying office equipment and supplies
- Providing the business the liquidity it needs to stay afloat
- General funding of other areas of the business
Difference Between Micro-Lending And Microcredit
The difference between microcredit and micro-lending is that the former is a financing alternative availed to the poor by micro-lenders such as banks and insurance companies. The latter is a type of microcredit where the entrepreneur running a small business is given cash payable at a specified interest percentage for a particular period.
Why Microloan Can Be A Good Option to Finance Your Small Business?
Microloans are not just like any other traditional business loan; unlike other business loans, they:
- Are typically fast to apply and receive.
- Give you a chance to qualify for a loan minus a business credit score.
- Do not just help the small-business owners, but are also a handy option to minority-owned borrowers and businesses that cannot get any other startup funding.
The eligibility requirements differ from lender to lender since each has its credit and lending terms. In general, intermediaries call for a personal guarantee and a type of collateral of the business owner before giving out the loan.
Technically, almost every registered business qualifies for microloans. In fact, the loans are usually recommended to businesses without or with a very little history. To encourage the effort of entrepreneurship, some lending institutions give the eligibility priority to women, minority business owners, and low-income borrowers.
How Do I Qualify for a Microloan?
Nowadays, all the loans given have some basic rules. To qualify for the microloan, be sure to:
- Demonstrate a good record of responsible financial performance in your professional and business life.
- Pay any outstanding loans, if present
- Try and upraise your credit score
- Provide a right quantity of evidence of the growth of your business
- Explore the various microloan options and settle on one that best suits your needs
How to Qualify for a Microloan
It is fortunate that the small business owners only have ordinary qualifications for microloans that are not stringent. There are however some specific steps that will position you to qualify for microloans quickly;
- Finalizing your business plan –This is an essential aspect. This is because lenders tend to look more into the future of the business and its success possibility than the past experiences of the business. Therefore, the business plan is the best option to assure the lenders that working with your business is a great choice, even in the long-run.
- Clean your credit report—Credit reports also play a part in qualifying you for a microloan. Your credit score should be in a tip-top nature. This is usually achieved by paying on time, ensuring a low credit utilization and checking your financial reports for errors
- Consider a personal guarantee or collateral—It is easier to qualify for a microloan when having these two.
- Be ready to invest some of your money into the business—Your own investment alongside the microloan is evidence to the microlender that you have an achievable mission concerning the business.
The Main Steps of Applying the Microloan
Be ready to meet the planning or training requirements of a lender when applying for a microloan. The business training is intended to help launch and expand your business. The below simple steps will help in the loan application.
- Find an intermediary microloan provider—Contact an approved and reliable intermediary loan provider in your local area to take advantage of the business development opportunities being availed to micro-lending borrowers.
- Complete all the business development requirements—Confirm if your lenders need you to fulfil any business training requirements before your application is considered. The requirements teach you about financial and business management. They also improve your chances of being a successful business owner. Because the process is somewhat subjective among the different lenders, your participation level significantly affects your capacity to obtain business funding.
- Submit your application—If the above steps are well completed, submit your application to the microloan provider. The application process is relatively quick. Contact your loan officer just after the submission to confirm the completion of the application.
- Wait awhile—Wait shortly for the microloan to be approved or denied. Wait as you give your lender some time to review your application carefully.
Repayment terms of these types of loans tend to vary depending on factors like the amount of loan, requirements of the intermediary lender, uses of the funds, and the needs of the borrower. The interest also varies depending on the intermediary.
Examples of Famous Microloan Companies
When applying for a microloan in the UK, it is important to choose a reputable company. Have you tried MarketInvoice? This is a short-term loan provider to provide quick and easy-to-get loans for entrepreneurs through their business loans. Their funding has seen the bringing forth of more than 1,200 businesses in the United Kingdom.
Another famous microloan company is the Swift Loans regulated by the Financial Conduct Authority. Their microloans are usually readily available, quick, flexible, and interest-rate affordable, therefore a good loan provider. They ensure that the financial requirements of a small business owner are fulfilled.