A micro loan is a small, short-term loan that you can use to meet financial needs for your busienss. If you’re self-employed, you may need cash quickly, but not enough to justify taking out a big loan. Maybe you need the money to pay your workers or to pay for a marketing campaign you think will increase your sales margins. Whatever the case, there’s a good chance that you’d rather consider taking a short-term loan-a loan that is easy to get and has a low interest rate. A short-term loan like this is typically referred to as a micro loan.
What are Micro Loans Used For?
Typically, micro loans can be for anywhere from $500 to about $50,000. Borrowers can use the money for different purposes including:
- Buying inventory
- Buying or servicing machines
- Buying office supplies and equipment
- Paying employees’ wages
Micro loans are typically faster to apply for than a traditional business loan. One of the most significant advantages that come with applying for a micro loan is that you may still be able to qualify for one, even without a business credit score. This is because micro loans are typically used for new businesses to help get them up and running. Not only are micro loans designed to help small business owners and entrepreneurs make ends meet, but they are also available to minority-owned businesses and borrowers that can’t get any other funding for their start-ups.
SBA micro loans can be used for a variety of purposes such as working capital for your small business, buying inventory and general funding for sectors of the business that need the boost. A business owner can use micro loans to provide their businesses with the liquidity they need to remain afloat.
How to Apply for a Micro Loan
Like any other type of loan, there are certain standards you have to meet to be approved. Eligibility standards vary from lender to lender but there are still some things to consider. If you think a micro loan might be the best thing for your business right now, here are a few steps on how to apply for one:
- Find a local intermediary micro loan The SBA suggests that you find a local intermediary micro loan provider in your community. There are intermediary providers all over the country, but a locally based one may be better placed to understand your financial needs as per the general local business environment.
- Complete and submit your application. Now is the time to be in close touch with your intermediary micro loan Most lenders have specific application requirements and paperwork. Try to keep your intermediary loan provider in the loop as you apply to ensure that you have completed all the necessary paperwork as required.
To improve your chances of qualifying for a micro loan, you need to:
- Complete your business plan-lenders will want to know that you have a solid plan on how to use the money they give you.
- Prepare evidence of your financial cash flow and statements.
- Give a solid plan and personal guarantee on how you intend to use the money if approved and how you will pay it back.
- Identify any assets you might be willing to use as collateral should that be required by the lender.
Once you’ve done everything, all you can do next is wait for the approval. The approval process might take a while since it has to go through the intermediary provider as well as the SBA. It typically only takes a few days to get approved, but may take longer if you need to supply more documentation.
How Does a Micro Loan Affect Your Credit?
The SBA says that on average, small business owners take up about $13,000 in micro loans at interest rates that fall between 8% – 13%. Micro loans are underwritten by non-profit organizations and as such, don’t have the same eligibility requirements you may find with traditional loans.
That, however, doesn’t mean that you shouldn’t pay close attention to your credit. Micro loan lenders place more weight on other qualification criteria, but your personal credit and business credit scores can come into play when deciding what interest rates you’ll end up paying.
Typically, micro loans are short-term loans, but some lenders will give you up to six years to pay it back depending on their terms and conditions. While these loans may not be as strict as traditional loans, you still need to pay them back. Failing to do so will negatively impact your credit score just as any other defaulted loan would.
Every small business owner needs a helping hand now and again, and micro loans are a great way to fund your small business.