Using Microloans to Fund Big Goals

We’ll Answer

What is a microloan?
What makes a microloan the right choice for my business?
How can I get a microloan?

Picture Clyde, a budding young farmer who has developed quite the green thumb working for other people.

Recently, his uncle left him a piece of land. It’s got great soil, and Clyde is thinking of starting his own small farm there, allowing him to provide for his family and his community.

But while Clyde has the land and technical know-how, he can’t cover the cost of some of the equipment he needs. The machines shouldn’t be too expensive, but their price tags stand between him and his goal of starting a business.

Clyde hasn’t owned a business before and hasn’t established his credit. But he needs money, so he’s thinking of going to a bank to get a loan.

But is a traditional small business loan right for this hopeful farmer?

Let’s find out

Who is a bank more likely to lend to?

Someone whose credit history shows they consistently pay back a loan

Someone who hasn’t developed a strong credit history

Someone asking for enough money to generate a lot of interest on the loan

Someone asking for a relatively small amount of money that won’t generate much interest

Someone who has run a business before.

A first-time business owner.

RESULTS

As a first-time business owner who only wants a very small loan, Clyde probably doesn’t land very high on a bank’s priority list.

Fortunately, Clyde might be able to get the funding he needs through a microloan.

Carry on, Clyde

If, like Clyde, you only need a small amount of money to start your business, you might want to look at getting a microloan.

These loans typically help new businesses cover the price of new machinery or basic day-to-day costs. Though the amount of a microloan is generally less than a traditional loan, it can make a big difference for a small business.

Still, microloans can come with high interest rates. So before seeking out this type of loan, it’s important to make sure that it’s the right way to fund your particular project.

So how do you know if a microloan makes sense for you? Well, if you’re just starting out, a number of factors can make it the right option.

While lots of people have great business ideas, they might not know what it takes to run a business. Many microlenders, however, offer advice, resources, and expertise (as well as funding) to help people develop business plans.

There are even microlenders who will work with you to create a plan that helps your business grow in stages. That way, you can build your organization to the point that more traditional lenders – like banks – will be open to you.

Many first-time business owners also lack strong credit, so traditional lenders might find them too risky. But since microlenders only work with relatively small loans, it’s easier for them to take a chance on people with poor or no credit.

In fact, there are businesses that use microloans to build their credit. By paying back a small loan on time and in full, you can help establish a good financial track record. This can help you get larger loans from banks in the future.

Additionally, microlenders often have social missions. This means that communities such as military veterans, women, immigrants, people with disabilities, and minorities may find lenders looking to address their needs.

If you’ve looked at your situation and decided that a microloan is the right funding choice for your business, you need to know where to get one.

Many microlenders are associated with nonprofit groups, so see if there’s one that matches your particular goals. There are also governmental organizations that give short-term loans to help small businesses.

To find a microlender, look at online search portals like the Association for Enterprise Opportunity or the Microfinance Gateway. You can also ask businesses like yours where they’ve gotten their loans.

TIP

Different microlenders can place specific restrictions on what you can or can’t do with the proceeds of your loan. Make sure you understand what a specific microlender offers before going with them.

While microloans often work for inexperienced business owners, it’s important to have some basic info about your project before applying for a loan.

Even if you don’t have a full business plan, many microlenders want to see that you’re competent and motivated. So know some details about your market, your potential customers, and why exactly you need funding to succeed.

You’ll also want to have a plan for paying your loan back. Try and project how much money you’ll be able to earn in a month, a year, and in 5 years. This will let you create a timeline for repaying your loan.

Lastly, know your credit score. If this is a new business or your credit is low, have a plan that will let you establish your business credit as quickly as possible, which can make it easier to find more funding in the future.

DO THIS NOW

While microloans can help lots of people start or expand their operations, they’re not right for everyone. Let’s take a look at your business and see if a microloan is the best choice for you.

Let’s do it.

RESULT

Hmmm…while a microloan can seem like the way to go, you might be better off looking for a traditional loan, which often has a lower interest rate. As a next step, put together the materials you need to approach a bank or another qualified lender. If you’re unable to get a loan from them, then consider applying fora microloan.

Got it

Great – it seems like a microloan would be right for your business. As a next step, do some market research to figure out exactly how much money you need, and then find a microlender to help you get the funds.