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It can be difficult to navigate your options for small-business financing. There are countless options that are suited to a variety of circumstances: from general working capital loans to disaster recovery loans, it’s not always easy to figure out which type of loan is best for your business.

Microloans are one source of financing that can be great for small-businesses facing unique circumstances.

But what exactly are microloans? What are they used for? Are microloans right for you?

Let’s take a look at what microloans are and how they can be applied to help your small business grow.

What are Microloans?

As the name might suggest, microloans are loans offered in small amounts to help small businesses fund a variety of business expenses.

These types of small-business loans typically range in amounts from as little as $500 to as much as $100,000—depending on your needs and intended use.

Like standard small-business loans, microloans can often be used for just about any business-related expense. This could include:

  • Working capital
  • Equipment financing
  • Personnel expenses
  • Startup costs
  • Expansion

Microloans are often easier to get approved for than traditional business loans, as they are offered in much smaller amounts.

Banks often try to avoid dealing with microloans, as they tend to not be very profitable. However, microloans can easily be obtained through alternative lenders and the Small Business Administration.

SBA Microloans

The SBA microloan program is a great resource for small businesses in need of financing. Through this program, the SBA works with lenders to help small businesses get financing at low interest rates with reasonable repayment terms.

The SBA does not provide funding itself; you still have to be approved by a lender. However, the SBA sets guidelines to help reduce the risk taken on by lenders and make it easier to get approved for microloans.

Microloan Applications

Running a small business can be quite expensive. Purchasing equipment, buying real estate, hiring staff and other expenses are often too costly for small businesses to afford on their own.

Microloans offer a great solution for small businesses who need help financing their new ventures. Popular applications for microloans include:

  • Leasing real estate properties
  • Office expansions
  • Hiring costs
  • Buying machinery
  • Working capital

While microloans often won’t provide enough financing to cover many of your major expenses, they are great for smaller expenses that are still too much for you to cover on your own.

Microloans: Pros and Cons

Should your small business take out a microloan as a source of financing? There are a few advantages and disadvantages to consider.

Advantages

First and foremost, microloans are a great source of financing that are easy to get approved for and are often granted in a shorter time frame than traditional loans.

If your financing needs are under $100,000, microloans are a great option. A good rule of thumb is to never borrow more than you need, even if you can get it.

Microloans will help you cover the expenses you can’t cover yourself without throwing your small business into too much debt.

Additionally, microloans:

  • Have reasonable interest rates 
  • Provide fair repayment terms
  • Are very flexible
  • Usually don’t require collateral
  • Help build credit

These advantages make microloans a great option to help small businesses grow and pursue new ventures.

Disadvantages

Many of the disadvantages of microloans are the same cons associated with any small-business loan.

This includes: having to repay the full amount plus interest in a given time period, creating the potential to damage your credit and being difficult to qualify for if you have a poor credit history.

Some other cons, specific to microloans, include:

  • They’re often limited to small businesses with a certain amount of employees.
  • The small amounts offered may not be enough to cover your expenses.
  • The repayment period is often shorter than traditional loans.

However, considering the advantages, these cons often aren’t enough to make microloans a bad idea for small businesses. Generally speaking, as long as you are able to make on-time payments on your loan, you can avoid many of these disadvantages.

Microloans are a great resource for small businesses in need of financing. If you need help covering the many expenses associated with running a startup, consider taking out a microloan in favor of a traditional business loan.

About the Author(s)

Ting Pen ValuePenguin

Ting Pen is a ValuePenguin Co-Founder. She previously evaluated corporate mergers and acquisitions as a Financial Analyst at Citigroup. Her experience in financial services combined with her entrepreneurial spirit allowed for her to start her own fin-tech company. Her passions lie in problem solving, growth, and travel.

Co-Founder, ValuePenguin.com
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