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.

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.