Microloans: Pros and Cons
Traditional business loans can be intimidating for some small business owners. You have to go through extensive applications, put down significant collateral, and pay back a lot of money over several years. Many small business owners realize microloans are a viable alternative.
What is a microloan?
Microloans are smaller, short-term loans with lower interest rates than typical loans.
Microloans themselves have different advantages and disadvantages when compared to other financial products:
- Microloan vs. Microcredit: What’s The Difference?
- Microloans vs. Personal Loans: What’s Better for Your Business?
- Microloans vs Lines of Credit: What is Better When You Need Fast Financing?
In this post, we will provide some of the pros and cons of this type of business loans to help you understand whether or not microloans are right for you and your business.
Pros of Microloans
Microloans tend to be smaller and scale which makes them beneficial to business owners for a few reasons:
1. Flexible Requirements
Microloans are not nearly as strict in terms of requirements when compared to traditional business loans.
Traditional business loans require you to have a very high business credit score, sufficient business history (usually having operated for at least a year is a requirement), and assets that can easily be liquidated if you can’t pay back the loan.
Microloans are more flexible and consider other factors. They are very personal, and microlenders will typically forgo looking at credit history and instead will look at personal references, personal collateral and what personal guarantees you can give.
For business owners who have not been operating for long or who have a shaky credit history, microloans can be a great option.
2. Quick Application Process
Traditional business loans can take months to get approved. Most business owners know that time is money, so having to wait for months to get the capital you need can really hurt your business and financial goals.
Microloans are designed to get you your money quickly. Typically, you can get approved and funded in one or two weeks when applying for a microloan, which can save you from having to operate underfunded for multiple months.
3. Training
Microloans are not only supposed to fund business owners, but they are also supposed to help guide smaller startups to become thriving businesses. This is why many microlenders offer advisors or business training along with their microloans.
This benefits both parties, as the borrowers can gain invaluable insights into running a successful business and the lenders can ensure the business owners they loan to will not fail and be unable to pay back their loan.
While it may seem like an unnecessary burden, having an educational component along with the loan will give you more knowledge that you can use in making your business even better.
Cons of Microloans
1. Small Loan Amounts
As the name implies, microloans typically do not involve large amounts of money. If you are looking to open a new location or buy state-of-the-art equipment you may need to look beyond a microloan.
Microloans are designed to give business owners a little push in the right direction, they are not going to bail you out of costly situations the same way a traditional business loan could.
Microloans are usually better served for smaller projects like replacing a piece of important equipment, hiring a few more employees, or buying a little extra inventory for the coming quarter.
2. Higher and More Numerous Payments
Although microloans involve smaller amounts of money, lenders typically want to get the money back as fast as possible. This means much shorter repayment timelines, which means you will be paying more per payment.
Some lenders even require you to make weekly payments, which means you need to be really on top of the repayments or you may begin to fall behind.
3. Some Microloans Have Restrictions
Some microloans have certain restrictions on what you can spend the resulting funds for. Many microloans do not allow you to use the gained capital to pay off loans or buy real estate.
You will need to get very familiar with the lender you choose and whether or not they have any spending restrictions.
Camino Financial Microloans
We offer our own version of microloans to business owners, take a look at some of the features and benefits of our microloans to see why they would be right for you and your business.
| Features | Advantage |
|---|---|
| Loans ranging from $25,000 to $75,000 (based on the cash flow of your business) | Offered Microloan amounts cover a variety of situations, whether you just need a quick boost to get you by or something more substantial to improve your business. |
| Flexible Payment Frequency (based on the credit of the borrower) | Many business owners will only pay once per month, which puts less of a burden on you. However, high-risk borrowers (those with poor credit histories) will have to make anywhere from 2 to 4 payments per month. |
| Payment Period of 24-36 Months | Longer payment periods mean you will pay less per payment, which gives you time to use your funds to build your business instead of having to pay back large sums immediately. |
| Funded as Quickly as 2 Days | Those approved for a Camino Financial microloan can get funded in as little as 2 days (this requires you to have business documentation available quickly, otherwise it could take longer to get funded). |
| Interest Rates Ranging from 25.50% to 40.00% | Interest rates vary based on years in business, collateral available, etc. For those who have strong cash flows and significant collateral, the interest rates will be quite low compared to traditional business loans. Those who don’t meet those requirements will have higher interest rates, but, likely, they would not be approved by other lenders at all. |
Be sure to learn more about the requirements and benefits of a Camino Financial microloan. You’d be surprised how much of a difference a little boost in your capital will make.
A Microloan is What You Need
At Camino Financial we always strive to fulfill our motto: “No Business Left Behind”, and a big part of that is helping you get the best financial product that will help you thrive and grow.
Apply for a microloan today and start forging the path to success.