Portrait of successful business woman standing with her colleagues working in background at office. Portrait of cheerful fashion girl in green dress standing with folded arms and looking at camera. Beautiful businesswoman feeling proud and smiling. Concept: micrloans
Derek Tallent
By: dtallent
Read in 9 minutes

Pros And Cons Of Microloans For Small Businesses

There are pros and cons of microloans that you need to consider.

This type of financial assistance is specifically designed for smaller businesses. They are an easier, quicker, and more accessible financing alternative.

While they can also be an extremely helpful tool for business owners who need working capital, they come with some upsides.

Understanding the advantages and disadvantages of microloans is essential before deciding if they’re suitable for your business.

Apply For A Business Loan!

 

What Are Microloans?

Compared with traditional loans, a microloan is a smaller (typically under $50,000) short-term loan with lower interest rates. Their goal is to help small business owners grow their companies.

These loans are often made by:

  • banks
  • credit unions
  • online lenders
  • the Small Business Administration (SBA)
  • CDFI lenders
  • other financial institutions

Despite their small size, microloans can significantly impact entrepreneurs and their businesses.

#CaminoTip
Don’t confuse microloans and microcredits.

They can provide the financial boost needed to expand a business, create jobs, and contribute to economic growth in underserved communities.

Keep reading to discover the advantages and disadvantages of these products.

Pros Of Microloans

Microloans tend to be smaller and scale, which makes them beneficial to business owners for a few reasons:

Flexible Requirements

Microloans are not nearly as strict in terms of requirements as traditional business loans.

Traditional business loans require a very high business credit score and sufficient business history (usually, having operated for at least a year is required).

But microloans are more flexible. They usually have less stringent requirements, which allow more business owners to receive approval.

For business owners who have not been operating for long or who have a shaky credit history, microloans can be a great option.

Fast Financing And Application Process

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.

Traditional business loans can take months to get approved.

On the other hand, microloans can get you your money quickly. Learning how to get a loan for your business is straightforward.

Typically, you can get approved and funded in one or two weeks (sometimes just a couple of days) when applying for a microloan with most lenders, which can save you from having to operate underfunded for multiple months.

Collateral

Most microloan products often require little to no collater.

This is important because it means that borrowers who do not have significant assets can still access this type of financing.

This can benefit borrowers who may not have the necessary assets to serve as a guarantee or simply don’t want to put their belongings at risk. In addition, in some cases, the lack of collateral requirements makes it easier to qualify for a microloan.

Variety Of Uses

Small business owners can use microloans for a wide variety of purposes, including:

These products can help you expand your business, keep it running during lean times, or even get it off the ground. That said, they are usually better served for smaller projects.

The beauty of microloans is that they can meet most of the needs of small businesses.

Whether you need a few hundred dollars to buy some new equipment or a few thousand dollars to cover inventory costs, there is likely a microloan that can help.

Many Lenders To Choose From

There are many different business microloan lenders available, which is a benefit for borrowers.

This variety allows borrowers to shop around for the best deal on a loan, and it also provides competition that can help find low-interest rates.

Borrowers should compare several lenders before choosing one, and they should also be sure to read the terms and conditions of the loan carefully.

Complete a microloan application

Cons Of Microloans

Smaller Loan Amounts

As the name implies, microloans typically do not offer large amounts of business funding. Therefore, 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 can give a small business owner a little push in the right direction. However, they will not bail you out of costly situations the same way a traditional business loan could.

That said, while the smaller amount might look meager to big and established businesses, it can help smaller companies thrive and grow.

Higher And More Numerous Payments

Because microloans involve smaller amounts of money, lenders typically have much shorter repayment timelines.

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.

Some Microloans Have Restrictions

Some microloans have certain restrictions on what you can spend the resulting loan funds for. For example, 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.

Interest Rates

Depending on the lender, interest rates on business microloans might be high, which can be a significant downside for borrowers. This is especially true if you have a bad credit score.

If a business is not doing well, the higher interest rate can make it challenging to keep up with loan payments and may lead to default.

Defaulting on a loan can have some consequences, including damage to one’s credit score, which can make it difficult to get future loans.

#CaminoTip
here we show you what is the difference between interest rate and apr.

The Top Microloans In The Market

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.

FeatureBenefit
Loan amounts$5,100 to $35,000 (based on the cash flow of your business)We offer microloan amounts to cover a variety of situations, whether you just need a quick boost to get you by or something more substantial to improve your business.
Type of paymentsMonthlyMaking monthly payments can help you manage your cash flow more effectively. You can ensure that you have the funds available to make your monthly payment without putting strain on your business.
Loan terms24 to 36 monthsLonger payment periods mean you will pay less per payment, giving you time to use your funds to build your business instead of paying back large sums immediately.
Interest rate (annual)31.55% to 54.90%Interest rates vary based on your credit score, cash flow (which we check using Plaid bank verification), and business information.
SpeedFunded as quickly as 2 daysThose approved 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).
Credit checkSoft credit checkA soft check doesn’t affect your credit score.

Our eligibility criteria are more lenient, which allows more applicants to receive approval. And because we care about you and want to see you grow, we offer educational resources and basic business assistance.

Apply today and learn how much of a difference a little boost in your capital will make.

Apply !

Small Business Administration Loans

There are many microloan options, but SBA microloans are among the most popular ones.

Feature
Loan amountsUp to $50,000
Type of paymentsMonthly
Loan termsUp to 7 years
Interest rate6% to 9%
SpeedIt can take weeks or months

The average microloan for this SBA program is $13,000, with an average interest rate of 6.5%. The thing is that these loans have a very slow application and approval process.

Plus, they require extensive paperwork and have stringent requirements.

The Micro Business Loans Small Business Owners 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.

Microloans are a great way to get the funding you need to start or grow your business.

With a Camino Financial microloan, you can borrow up to $35,000. Our terms are flexible and can fit the unique needs of your business.

Our team of experienced loan officers will work with you to find the best loan solution for your business.

Apply for a microloan today and start forging the path to success. We look forward to helping you grow your business!

Submit An Application

 

Check if you
qualify for a loan

LEARN MORE