what are micro loans

what are micro loans

There was a time when the only mention of a micro loan was in reference to a community development program in a far away land. That’s not the case any more. Non-profits saw a need in the United States and now offer low- and no-interest loans to small businesses all across the country. The SBA identifies any loan under $50,000 as a microloan, but many of these loans are in the $5,000 to $10,000 range.

In addition to lenders, cities and other community groups sometimes offer no- or low-interest loans within redevelopment districts to encourage businesses to do such things as improve the façade of their storefront, improve the structural infrastructure of their place of business, or create jobs. Some non-profit lenders have a mission-driven focus and target small businesses with the potential to help local communities grow.

What Type of Businesses Use Microloans?

Stacey Sanchez, of San Diego-based non-profit CDC Small Business Finance, describes the average small business who utilizes this type of financing: “We work with many different businesses. Restaurants, small merchants, and other businesses the average person might associate with Main Street. We help a lot of startups get off the ground as well as some businesses that might have been around for a while, but don’t need a lot of capital. Many businesses could be a fit for the microloan program depending upon the nature and size of the business, and where it’s located.”

“A borrower who might be looking for $3,000 or $5,000 would probably be pushed into a credit card or turned away entirely from their local bank. A loan that small just isn’t what the bank wants to deal with. However, that very small amount of capital can have a big impact in the right hands. Let me give you an example.

“An entrepreneur in Arkansas was making cheese out of the kitchen of his church. He only produced a few gallons every week, but his friends and other customers loved what he was doing. His cheeses was so popular, he wanted to take what had been a hobby and turn it into a business—but he didn’t have the capital to buy the equipment necessary to increase production.

“He didn’t need much capital. He wanted to buy a 500-gallon cheese vat, which would grow his production capacity by about 100X. The loan he used to buy the bigger vat has helped Kurt Walker Cheese become the biggest cheese manufacturer in Arkansas. A little bit of capital with a very big result.

“I could share hundreds of stories like this. It doesn’t always take a lot of money to grow a healthy, thriving business.”

Many of the businesses that find success with non-profit lenders are some of the very smallest small businesses and the micro-loan amounts and terms are often a perfect fit for businesses that don’t have large capital needs. In other words, many businesses, that don’t need a lot of money to create a big impact, can use a micro loan to fuel growth initiatives or get their businesses off the ground.

What’s It Like to Work With a Non-Profit Micro Lender?

It’s important to realize that all non-profit lenders are not the same. CDC Small Business Finance, for example, works within the SBA’s micro loan program and will loan from $5,000 to $50,000. Kiva Zip uses a hybrid crowd-based model and makes loans of $5,000 to $10,000—so it’s important to find the right non-profit to work with.

With that in mind, don’t be surprised to find that some non-profits take a more traditional approach to working with a small business than others. What’s more, regardless of the lender you choose, many of these lenders take a very hands-on approach when working with borrowers and offer a lot of mentoring and advice along with the funds.

You should expect that each non-profit will have different lending requirements. Depending upon the lender, it’s possible to borrow to meet working capital needs, ramp up a marketing campaign, fuel a growth projects, or meet other similar business needs.

As with other lenders, if your business has sufficient cash flow to support a loan payment, you haven’t declared bankruptcy in the past 24 months, and are current with your personal obligations like your rent or a mortgage for the last year, you may qualify.

Additionally, other non-profit organizations, that are not lenders, serve the small business community and offer funding advice. The Association for Enterprise Opportunity (AEO) and SCORE are two good options. And, in addition to their micro loan program, the SBA offers a advice for the businesses in this category and works with CDFIs designed to help small businesses.

The smallest small businesses aren’t always served well by traditional lenders—making non-profit lenders and important part of the small business lending landscape.

Micro loans are really tiny, itsy-bitsy loans that require a microscope to see them.

Fine, fine. The term micro loans is often used differently depending on who you ask. However, the most commonly accepted definition is loans of a relatively small dollar amount used to help small businesses and entrepreneurs grow or sustain their businesses. The dollar amounts, according to bank definitions, range from $500-100,000.

$100,000? That seems like a pretty big loan!

True. We wouldn’t call anything about a hundred grand micro. But we’re just giving you a definition here. Also, keep in mind that the average micro loan in the U.S. is just $13,000, and United States businesses only receive a very small percentage of the micro loans around the world. Typically, micro loans are given to small, struggling communities in economically challenged countries to support entrepreneurship and the local economies.

Does Lendio have any micro loan options?

While our partners don’t technically consider their loans to be micro loans, we fund small businesses looking for nearly any amount of money, be it large or small. Some definitions may make our smaller loans sound like they qualify as micro loans, but we don’t call them “micro loans.” We simply find a way to get you as many funding options we can, in a way that suits your business – whether that means a few thousand dollars or a multi-million dollar loan.

Though we don’t technically offer micro loans to our customers, Lendio does work with Kiva.org to provide micro funding to entrepreneurs in need. We have have now funded more than 300 loans to deserving entrepreneurs in 70+ countries.

Wow, that’s awesome of you. By the way, your joke wasn’t that bad at the beginning.

Thanks. We appreciate the small acknowledgement. We only expected a miniature giggle. It was just a pint-sized joke.

Microloans are small loans that aim to support new entrepreneurs and give funding to new business ideas.

A Microloan is a small loan offered to someone or a group of people in need. Microloans are generally helpful to entrepreneurs who are just starting out and need extra cash to expand. Many microloan programs aim to support entrepreneurs in the developing countries.

Microlending is different from traditional mainstream lending in three ways: the motivation, the people involved and the size of the loans. One main aspect of microlending is the motivation behind it.

Traditional lenders are focused on earning a profit. On the other hand, microlenders’ main goal is to help emerging entrepreneurs who would otherwise not be able to borrow. The loan is geared towards development.

Microloan programs and organizations might as well provide training. Entrepreneurs are taught how to run a business. This is the opposite of other lending institutions where no training is provided for starting a business.

Kiva is one example of a microloan program that has helped millions of people get funding in 80 different countries.

Microloans are small and may sometimes start as $25. Depending on the part of the world, a microloan may be of a decent amount and still be sufficient to buy inventory and turn a profit.

However, in the U.S anything under $50,000 is considered a microloan by the Small Business Administration. People who typically use these loans are self-employed with low incomes. Thus, they are unable to qualify for a loan from banks.

Now that we have covered the microloan definition, what are the steps of the microloan application process?

  • Shop among various microlenders to find the best deal. The SBA provides a detailed list of all the micro-lending organizations.
  • Ask your local bank or an online lender about your eligibility to borrow.
  • Read the fine print and compare the terms before choosing a micro lender.

There are two main ways to access microloans. They can either be offered by a single individual or a number of individuals who each contribute a portion of the total amount. They are often given to people in third world countries where small business owners cannot gain access to traditional lenders.

Since these borrowers have a high risk of default, microloans attract an “above market” rate, and this can be an enticing venture for some investors.

The Risks and Rewards of Micro Lending

It is impossible to address the microloan definition without mentioning the pros and cons. The worldwide Internet connectivity has greatly facilitated microloan programs. Lenders and borrowers can easily transact online.

The lender may end up at a loss if the borrower fails to pay because microloans are not backed up by any collateral. The credit rating of a borrower is imputed using the following data:

  • A background check
  • Repayment history if you have been offered a loan in the past

Because of the inherent risk, lenders will only offer a small loan amount. However, they may fund several other microloans, but again, in small amounts. By spreading the risk in this way, lenders ensure their portfolio is not wiped out even after some borrowers default.

Most microloans are in the form of peer to peer lending.

We all need a little extra cash from time to time, whether it’s for groceries or sudden emergencies like a broken window. The major banks are particularly geared for large scale loans and mainly in the form of secured low-risk loans with significant collateral. This is sadly not an answer to emergencies or short-term situations. Micro finance loans are becoming a more realistic and available option for consumers needing short term, quick cash. Applications can be facilitated easily with very fast and even ‘over the counter’ or same day turnaround time. Furthermore, minimum requirements are less demanding than term loans. In short, they’re a simple, user-friendly solution to a problem that anyone can face at any point in life’s journey.

What makes them better than ordinary loans?

Micro finance loans are designed to be quick, with short repayment periods and simple, no-collateral agreements. Most banks or large scale lenders require surety, a spotless credit record, and a considerable paperwork before they’ll even consider you for a loan, even if the amount is not substantial. This highlights the significance of micro finance loans.

Since these loans are unsecured, as mentioned, this implies you won’t need to put up your house or car to successfully secure the amount. They are based on smaller amounts, so repayments are more affordable. It is also possible that the convenience of more than one repayment option can be presented to the borrower. A poor credit record due to falling behind with a previous account, for instance, will not necessarily prejudice your loan application here, provided reasonable steps have been taken to address the default.

Major lending institutes can easily reject applications, even for qualifying candidates who can afford it, on the basis of a relatively marginal credit default. This is exacerbated by poorly compiled and submitted applications. With cash loans, coupled with reliable and efficient online applications procedures via reputed facilitators, this isn’t a problem anymore.

You can get a micro finance loan in the space of a day, with no more paperwork than if you were getting a mobile phone. This is minimised further with secure online applications. The services of an accredited and registered company will not only be able to smooth the entire application, but also address various queries you may have. A quick cash loan for up to R15, 000 requires you show only a bank statement, payslip, and proof of identification and residence. That means it can be completed and cleared into your account between 24 to 48 hours, sometimes even on the same day.

You can find good microloan providers easily by simply searching online. Your provider should be knowledgeable and be able to explain their requirements and the procedure clearly. Once you’ve already assessed the website and found your specialist facilitator, micro finance loans provide a simple, powerful solution to everyday cash flow challenges.

What Are Microloans and How Can I Get One?

One of the great ironies of small business financing is that the less money you need to borrow, the harder it can be to get. If you’re seeking less than $50,000 in capital, a microloan may be worth considering.

Although the definition of a microloan may vary depending on the organization making the microloan, in general, microloans share these characteristics:

  • Very small loans ($500-$50,000)
  • Short-term loans
  • Designed for businesses with little or no credit history, low-cost startup businesses, sole proprietors or businesses with very few employees

Microloans can be used for many purposes, including working capital, inventory, fixtures/furnishings and equipment or machinery for your business, among other things . Some microloan organizations are set up to help under-resourced populations, including minorities, women or companies providing employment in underserved areas.

A primary benefit of microloans is that they may allow business owners to get smaller amounts of financing than most banks can offer. On the other hand, the interest rate for microloans may be higher than the rates offered by banks for larger loans.

One side benefit of some microloans is that microlenders may provide additional assistance along with the loan. In fact, some microlenders require you to take courses in topics such as business plan writing, accounting, marketing, and other business basics as part of the application process.

There are many microlenders focusing on specific states, regions or communities. Your local municipality, Chamber of Commerce, economic development organization, SCORE office, SBA district office or Small Business Development Center (SBDC) can also help you find microloan sources.

Even though obtaining a microloan is generally easier than getting approved for a traditional bank loan, you’ll still need to do the following.

As with any other loan application , write a business plan. Lenders like to see what you plan to do with the money as well as your future plans for your business.

You should also get your credit report and make sure there are no errors on it. If your personal credit rating isn’t top-notch, take steps to boost it before applying for a microloan.

Put skin in the game: Microlenders often expect you to invest your own money in your business, even if it’s a nominal amount. Some also expect you to get financing from friends and family before applying for a loan. Also, be prepared to put up collateral or offer a personal guarantee.

By taking steps to investigate your microloan options, you can make an informed decision about whether a microloan is right for your business.

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