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Microloans: How Small Loans Can Go A Long Way For SMBs

Starting a new company isn’t cheap, and even small businesses typically need a boost of capital to get going. Unless you’re able to bootstrap your way to success, you’ll probably need to borrow money upfront and pay it back as you start bringing in revenue.

Loans and other sources of credit are just a part of running a business. A 2020 survey found that only 21% of SMBs are entirely debt-free. If you don’t have savings to invest in your business, loans are the obvious way to cover startup costs such as licenses, permits, equipment, supplies, promotions and more.

You can have an excellent idea for a new product, the perfect business plan to bring it to market, a team of dedicated employees ready to make it a reality and access to the best tools around: CRM, website builder, bill paying service, digital marketing; but, unfortunately without the funds to get you started, it can all go down the drain.

What’s a microloan for small businesses?

They say it takes money to make money. But, there is no specific qualifier on the amount of money it takes to make money.

A microloan is just like a small business loan, only smaller. Designed for small-scale operations, run by a single person or a few people, that only need a low level of funding. Due to the lower amount of money involved, microloans are often more accessible with fewer requirements for businesses looking to apply.

Microloans can be a great option for many startups who face challenges accessing credit or only want to borrow a small amount of money. Generally speaking, microloans operate the same as traditional lending but on a smaller scale and in a shorter time frame. The lender provides a lump sum to a recipient who pays back the debt with interest over a set period of time.

Microloans are not available to larger businesses. Instead, they’re specifically designed to support small businesses looking to get started or make a significant purchase that can help them develop their operations.

A lot of institutions offer microloans, including government departments and private companies. For example, in the US, microloans are available from the Small Business Administration (SBA), the Department of Agriculture (USDA), mission-driven organizations, online lenders, alternative lenders and peer-to-peer funders.

Generally, microloans are $50,000 or less. The average value of an SBA microloan is about $13,000. Though the terms vary depending on the lender and the amount, microloans are typically paid back over one to ten years.

While microloans can be an excellent tool for small businesses needing credit, you should always check the details carefully. Public entities offer low-interest rates while some private microlenders charge very high rates compared to traditional loans. As a result, you may end up paying back considerably more than you borrowed.

What can you use a microloan for?

We’ve focused on startup costs, but recipients can use a microloan for almost any part of their business. With that being said, some lenders may have restrictions. For example, SBA microloans, can’t be used to purchase real estate or pay off existing debts.

Whether you have a large one-off purchase to make or a piece of equipment that can revolutionize your business and drive growth, microloans can bring you closer to your business goals.

Examples of what you can use your microloan for:

  • Working capital.
  • New marketing.
  • Building a website.

What you spend the funds on is the exciting part; paying it back, not so much. There are always risks involved when borrowing money, even when the amount borrowed is smaller. Make sure you’re borrowing money for something that will drive value and enable you to meet the repayment schedule. If mismanaged, low debt levels can spiral and leave your business precarious.

The benefits of microloans

The main advantage of microloans is that you’re only borrowing a small amount which limits your debt. Plus, it’s usually easier to get approval for a microloan compared to traditional borrowing, where the lender takes on greater risk.

Microloans cover a particular niche of people that are looking to start a company on their own and need access to capital.

Other microloan benefits include:

  • Fixed and reasonable interest rates: while some private lenders look to take advantage of small businesses, there are many microloans available that offer fixed and fair interest rates. So, you don’t have to worry about fluctuating rates and waking up to find out your repayment plan has changed.
  • Flexible options: microloans are explicitly designed for small business owners looking to get started or grow their operations. Lenders understand this and know different small businesses are in very different stages of starting or growing their businesses. With that in mind, many lenders offer flexible repayment plans with ample time to pay back the loan. For example, microloan repayments could span anywhere from one to ten years.
  • Consumer programs: many microloans, particularly government-backed ones, come with additional programs that help educate the borrower’s knowledge of financial management. There’s a good chance applying for a microloan is your first step into the business world, and these programs can help set you up for success in the future.

Small business microloans can lead to big success

Businesses come in different shapes and sizes. The global economy goes from giant multinational corporations to a single person working on their side hustle. Microloans offer an essential service, providing capital to people looking to start small without significant overhead or long-term debt.

Small businesses are the backbone of the economy, and microloans allow more people to enter the business world and start building their own companies in their own unique way.