How Microloans Can Help Keep Your Small Business Afloat

By Chinwe Onyeagoro

Microloans are small loans, typically around $25,000 or less, that can be used for business expenses, particularly for people who have low to moderate incomes. They are typically provided by community-based, non-profit organizations and can significantly help lower income entrepreneurs get a leg up. Microloans also offer competitive interest rates and are accessible to borrowers with poor credit or no collateral.

While not everyone qualifies for a microloan, they can help provide extra funding to keep a business insulated when working capital drops to a low point. Unfortunately, even a small business requires funding to get started and without it the business will have limited prospects. Lack of funding and realistic expectations can kill a business within months. Microloans allow borrowers to responsibly avoid this issue from the beginning and get funding fast.

Why Get a Microloan?

While everyone’s situation is different, there are several reasons why someone might choose a microloan over a conventional loan.

Microloans are available to individuals who do not typically qualify for conventional loans. If you have been turned down by financing companies due to a poor credit situation or a lack of credit history, microloans might work well for you. Microlenders often specifically target minorities or people who live in underserved communities.

Microloans offer competitive interest rates for high risk borrowers like startups. Terms can be as long as 6 years and interest rates may vary from 8 to 16 percent. These rates are quite competitive relative to other lenders that target these types of businesses, such as merchant cash advance and asset based lenders. Not qualifying for a conventional loan doesn’t have to mean you won’t get quality loan terms!

Finally, microloans are typically funded by non-profit organizations rather than banks or for-profit financing companies. Non-profits are usually more concerned with serving the community rather than shareholders. This mission-oriented focus also means that businesses that receive microloans also have access to training, technical assistance, and support throughout the loan term. In the event that a business falls on hard times, a microlender is more likely to flex payment terms to help a borrower through a rough patch.

Should You Get a Microloan?

When considering a microloan, it’s important to understand the requirements and limitations. Microloans are typically not designed to fund a large business with substantial working capital or growth funding needs. They are more geared toward small companies like new food trucks, neighborhood retail stores or local service providers. If you need more than $100,000 to finance a huge operation, microloans are basically off the table.

Microloans are a great fit for small businesses and budding entrepreneurs that need the extra cash. Take the time to talk to a financial advisor about whether or not a microloan would be a good fit in your particular situation or if you should consider a conventional loan instead.

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Chinwe Onyeagoro
Chinwe is the CEO & Co-Founder of FundWell. Chinwe has a strong personal interest and a professional track record devoted to helping organizations raise capital. She co-founded, capitalized, and operated a boutique consulting firm, called O-H Community Partners (OHcp), that over the last seven years has successfully raised a total of $120 million in grants, competitive loans, tax incentives, government subsidies, and owner equity financing on behalf of clients across the country.

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