Many startups and struggling businesses have a hard time getting financing from traditional lenders. They may not have the down payment, collateral, or profit margins to qualify for a loan.
One solution is to get a microloan. Like the name suggests, microloans are smaller business loans that range anywhere from $5,000 to $50,000.
Typically, microloans are issued by nonprofit organizations or government agencies like the United States Department of Agriculture (USDA) or the Small Business Administration (SBA).
For example, the SBA microloan program is intended to help women, minorities, veterans and other small businesses get a leg up in the business world. The average SBA microloan is $13,844, and the requirements to get one are generally a lot less strict than those for a traditional business loan.
Despite all the benefits, microloans also have drawbacks. That’s why in this article, we’ll go over all the pros and cons of getting a microloan so you can make an informed business decision:
Table of Contents
Pros of Getting a Microloan
First, let’s go over the advantages of microloans. Microloans offer all of the following:
- Low interest rates—If you get an SBA microloan, the average interest rate is 7.5%, which is far better than what you’ll get from a typical online lender.
- Looser lender requirements—Since lenders take on less risk with a microloan, their requirements are also looser. You won’t need as good of a credit score, business history, or collateral to qualify.
- Faster financing—Microloans process faster. Once you’re approved, lenders distribute funds quickly, sometimes within a month or less. To speed up SBA microloans, find a lender that uses loan origination software that integrates with the SBA E-Tran portal.
- Extra resources—Because microloans are considered a tool for helping small businesses, they often come with free training resources, coaching sessions, and more. Sometimes these extra resources are all your business needs to get to the next level.
Cons of Getting a Microloan
That said, microloans also have the following drawbacks:
- Limitations on who can borrow—Microloan lenders favor business owners who need the financing the most. That means if you don’t fall into the category of minority, woman, or veteran, you may have a harder time qualifying.
- Small loan amounts—With a microloan, the most you can expect to get is $50,000. If you need more, you’ll have to get a traditional loan instead.
- Usage restrictions—Many microloan lenders have restrictions on how you can use the loan. For example, most don’t allow you to use the loan to pay off debt or buy real estate. Ask the lender about their restrictions to be sure.
- Short repayment terms—Unlike traditional loans, microloans tend to have shorter payment periods. That means there will be fewer payments and each one will be for a larger sum than if the loan term were more spread out.
- Different fees involved—When you get a microloan, you’re charged for more than just interest. Often there are application and processing fees, closing costs, and search fees for titles and liens. You need to take all of these into account to know the full cost of the microloan.
Final Verdict
Now you know the pros and cons of taking out a microloan!
Just remember that every business is different. Yours may not be at the right stage for a microloan just yet. But if and when it is, you’re now prepared to make the right decision. Carefully weigh your financing options and then help your business leverage debt to grow.