Are you experiencing cash flow problems? Your small business might benefit from a microloan. A microloan is a powerful funding solution for businesses for several reasons. Whether you need cash flow help now or are planning to invest in marketing or expand your operation, it may be the answer.
Traditional bank loans are cheaper to get for business owners, but they are hard to get if your business is just getting started. Microloans give you access to funds even if you lack a credit history or otherwise cannot get a bank loan.
These loans are beneficial to entrepreneurs with microenterprises — businesses with fewer than five employees — who do not have access to conventional bank financing. Restaurants, salons, and taxis are typical examples of dealings that use these kinds of small business loans.
This post aims to help you better understand microloans and whether they are a good fit for you and your business. To better understand it, microloans have several advantages and disadvantages. Click here to know about micro loans.
Advantages of microloans
There are various advantages you can get from acquiring a microloan for your personal or business need. They include:
- Flexibility in requirements
Traditional business loans are much more stringent in terms of conditions, whereas microloans are not.
Traditionally, business loans require you to have an exceptionally high credit score. A satisfactory business history — usually operating for at least a year is a requirement and assets that they can liquidate if you cannot repay the loan.
A microloan is more flexible and considers other factors. It is a very personal loan, and microlenders often focus on personal references, collateral, and the extent of your guarantee instead of looking at your credit history.
When a business owner has not been operating for very long or if their credit is shaky, microloans can come in handy.
- The quick and easy application process
Getting a traditional business loan is a long-term process. Most business owners understand that time is money, so having to wait for months to get the financing you need does not benefit your business or finances at all.
The purpose of microloans is to provide you with cash as quickly as possible. Typically, applying for a microloan can get you approved and funded within one or two weeks, allowing you to avoid operating underfunded for long periods.
- Provision of training programs
Besides funding entrepreneurs, microloans are also supposed to help small businesses grow into thriving entities. Because of this, many microlenders provide business training and advisors along with their microloans.
Lenders can ensure that the business owners they lend to won’t fail and won’t fail to repay their loans. It benefits both parties.
The educational component of the loan may seem redundant, but it will help you improve your business even further by giving you more knowledge and experience.
Disadvantages of microloans
- Minimal Loan Amounts
A microloan does not involve a large sum of money, as the name implies. You may need to look beyond a microloan if you are opening a new location or buying state-of-the-art equipment.
It’s not like a traditional business loan will bail you out of costly situations the way a microloan would. Microloan’s primary purpose is to give business owners a little push in the right direction.
Most microloans are best suited for smaller projects, such as replacing a single piece of essential equipment, hiring a few new employees, or purchasing more inventory for the next quarter.
- Payments that are higher and more frequent
A microloan typically involves smaller amounts of cash, but lenders generally want to recover their money as quickly as possible. In this case, the repayment timelines are much shorter, so you’ll pay more per payment.
Depending on the lender, you may have to pay weekly, so you need to be diligent about paying your payments, or you will fall behind.
- Microloans may be subject to restrictions
You may find restrictions on what you can use the loan proceeds for if you get a microloan. The money you gain from microloans is not usually available for paying off existing loans or purchasing real estate.
To understand whether your lender has spending restrictions, you will need to become familiar with them.
Microloans are a vital part of our society. They offer many benefits to individuals and businesses by mainly providing a small loan with a flexible repayment period that formal banking cannot meet. If you’re thinking of getting one, it could be one of the best decisions you’re about to make this year.