Small businesses are having more success funding themselves with micro-loans when traditional lending methods don’t work out. That’s mainly because non-profit micro-loan lenders aren’t seeking to make a profit from their loans to small businesses. These so-called mission-based lenders are designed to help those who are already at a disadvantage. Here’s a peek at five things you should consider to help you decide if a micro-loan is right for your small business.
You’ll Still Need a Comprehensive Business Plan
You may not be able to get a traditional bank to lend you money for your business idea, but you may be able to get by with a micro-loan. However, you should still have a solid business plan that describes how you plan to generate revenue, how you plan to succeed, and key indicators that show you understand your niche. Micro-loan lenders will analyze your business plan before processing your loan application, so it helps to be as detailed as possible.
Typically Applies to Between $5,000 and $50,000 Loans
Micro-loans are typically given between $5,000 and $50,000. These loans are a bit more flexible than traditional loans because they are less reliant on your credit score and personal history. That’s because these micro-loans typically have a higher interest rate than what you could get from a traditional loan. Despite that, micro loans are more manageable in the payments department, which is one facet that makes them ideal for small business owners.
Micro-Loan Financing May be Limited
Most mission-based micro-loan financiers rely on donations, endowments, and government guarantees to finance their loans. Because of this, your options for micro-loans may be limited according to the state in which you reside. Most SBA micro loans average about $13,000 which may not be enough for your business plan, depending on your scale. This limitation could mean you would still have to seek more funding elsewhere or come up with the funds yourself.
Collateral May Help Your Odds in Being Approved
Offering up collateral against the micro-loan can sincerely help your odds of getting approved. Your home, vehicle, or any other valuable assets can be offered as collateral against the loan. You should also share with your micro-lender any monetary amounts you’ve already invested in the business, as this shows you have contributed your funds and are seeking to make the business a success. Make sure your credit report is as clean as it can be, even if it’s not perfect. Try not to miss any loan or credit card payments, as these can negatively impact your credit score immediately.
Understand the Loan You’re Applying for Inside and Out
SBA micro loans carry with them specific terms and conditions that are set forth by your lender. The maximum term an SBA loan can be held for is six years. The loan amount, interest rate, and the standards of your lender will all help determine how much you’ll have to repay when the time comes. Make sure you understand these terms intimately, so there are no surprises down the line.