Everything You Ever Wanted to Know About the Business Micro Loan
Small business owners like yourself need to pay close attention to their funding needs. Not doing so gives you little time to explore your funding options. But should you find yourself yourself in a financial pinch, you may be a perfect candidate for the business micro loan.
Taking out a loan can be a risky maneuver, but it could also be a beneficial decision in the long run if you manage loans well. In order to understand one of the most recently popular business funding options, here is a closer look at the business micro loan.
What is a Micro Loan?
In 1992, the Small Business Administration introduced the Micro Loan Program to make smaller loans more readily available to small business owners. Since its inception, this program has been responsible for hundreds of thousands of dollars to business owners.
Micro loans are eligible to meet any business need. For example, a small business owner can use it to acquire working capital or for supplies and equipment. The highest business micro loan lands at $50,000.00, but the average micro loan is $13,000.00.
How to Apply
Small business owners can apply for a micro loan through community-based, non-profit organizations or micro loan intermediaries. 200 such organizations exist throughout the United States. The Small Business Administration provides a list on their website on these organizations along with their location and contact information.
Small business owners will need to provide documentation. First and foremost, they need a detailing what the funding needs are and how those funds will be used to generate a healthy return on investment. They have to show how they plan to make repayment on the loan. A business owner demonstrating their own equity injection (that is, using their own cash/assets) usually gets more favorable results.
Micro loan lenders are primarily concerned with one thing most of all: a business loan having a positive social and/or economic impact on the area in which the business operates.
Consult with a micro loan lender in your area.
Benefits to a Micro Loan
As mentioned previously, small business owners can use the money however they see fit provided that they can demonstrate the social and financial return on investment.
Hence, the business plan. The business plan documents the forecasted journey from start to profitability. Another way to refer to profitability is sustainability: can the business sustain itself with its current model?
A micro loan is a great funding option for business owners that do not have much by way of personal and business credit. Younger small business owners who have not yet built any credit are more likely to gain a micro loan from a lender than a loan from a bank.
In fact, most banks prefer not to service such small loans anyway, but the micro loan program encourages them to do otherwise.
Older business owners that do not have great credit can get access to a micro loan for the same reason. Most lenders consider senior entrepreneurs too high of a risk for lending. Starting with a micro loan gives opportunity for risky borrowers to improve their credit and demonstrate responsible pay back.
Smaller start-up companies with lower capital demands are great candidates for a business micro loan. Under normal circumstances a business with a limited operating history and smaller scale would not turn the heads of lenders. Again, the micro loan program changes this dynamic.
Risks with a Micro Loan
There are some concerns when it comes to dealing with a micro loan.
To begin with, small business owners need to look at the interest rates that come with these loans. In most cases, the interest rate can be higher than rates on a standard business loan.
Some communities fare better at gaining access to these funds than others, based on economic need and access to business micro loan intermediaries.
These community centers are lenders and will operate based on that center’s policies. Rules and requirements at one location might be completely different from another location the next community over.
Hence, small business owners certainly need to gain close relationships with personnel at a primary community location. Once relationships are established, business owners and micro loan centers can work together to meet that business’s needs.
Need an Alternative? Consider Using Credit Cards
Many people find that a great alternative to traditional business funding is using unsecured credit lines (otherwise known as “credit cards”) for their business.
Strictly speaking, an unsecured credit line in the form of a credit card is a type of micro loan, and the rates may be better than one can find anywhere else.
Using credit cards for business means accessing revolving credit. Revolving debt – you use what you need and only pay off what you use – allows small business owners the chance to cover gaps in cash flow with ease. Most business owners needing capital for 1-2 years of ramp-up, growth, or startup costs find what they need using 0% interest credit cards (both business and personal).
There is Always Risk
Both business micro loans and unsecured lines of credit pose a few risks to the business. For the business owners that do not carefully budget, the money will disappear quickly.
At the end of the day, the entrepreneur can never eliminate risk: the goal is always to manage that risk with savvy planning. Consider working with a professional whenever possible, even if you feel that you can do it yourself.
The main difference between standard micro loans and unsecured credit lines is the difference in terms. Most business micro loans are installment: set monthly payment, set interest rate, over a set period of time. Credit cards calculate a minimum monthly payment based on the balance you carry. 0% introductory rates typically adjust to 11-18% interest after the introductory period expires.
Most standard micro lenders will not negotiate terms later, but banks issuing credit cards will improve rates and terms if you know how to build the relationship.
By and large, the longer a business remains in business, more lending opportunities arise allowing entrepreneurs to consolidate or refinance their debt down the road.
This is a lot of information to process when weighing your micro loan funding options. Take the process a step at a time, do your research. It is always a good idea to talk to someone and get a free assessment of your “fund-ability.” Whatever route you choose to take for your business, know that many just like you have come before, overcome countless obstacles, and have both a profitable business and inspiring story to be proud of.