If you run a small business, chances are you need more funding. While small business loans can be a great source of capital, sometimes you don’t need that much money to justify jumping through hoops that often comes with getting a small business loan.
Some business owners try to seek funding through connections.
A business owner might ask a good friend of his for a couple hundred or even a thousand dollars as an investment.
Other business owners might seek some help from their parents or grandparents to get their business out of a jam.
This can seem like a promising option, and it very well might be for some people. But many business owners tend to overlook getting a microloan from a lender, which can often give you just enough funding without the hassle or a bigger business loan.
In this post, we will be comparing getting a microloan versus borrowing from friends are family, and helping you make a more informed decision on which one might be better for you.
Borrowing From The Three Fs: Friends, Family, and Fools
A common saying in the business world is that if you need equity look to the Three Fs: Family, Friends, and Fools.
While this might seem a bit of a joke answer, there is often some truth that the ones who know you best may be more willing to help.
There are a few advantages to borrowing from family or friends.
- If they trust you the loan may not require interest or even have an end date.
- These types of loans are often informal, and typically those close to us are more understanding if we need more time to pay back the loan.
- Family and friends also don’t have the typical requirements of a normal loan.
- They might not check your credit, want to see your business documents, etc.
- The idea is that they trust you and want to help you succeed.
But there are some drawbacks to borrowing money from friends and family (or fools as the cynic would say). Usually, the loan is informal, which comes with a lot of negatives:
- Terms can change on a whim, what if your lender has an emergency and needs the money back? What if your friend increases the agreed-upon interest rate?
- While you may not legally have to pay anything back, there is a lot of social pressure involved.
- These are people that are likely important to you, and not paying them back could do irreparable damage to your relationship.
- Word could also get out that you didn’t pay back a loan which could damage your reputation with a lot of people other than the lender.
- Even under better circumstances, an outstanding loan can still put a strain on a relationship.
- Nothing makes a social event more awkward than having to see the person you owe thousands of dollars too.
- There are a lot of hidden social costs to borrowing money from those closest to you.
A microloan is a very small, short-term loan that is often given with low-interest rates to smaller businesses or those who are self-employed. Microloans may be small but they still can range from $500 to $50,000 (or more).
Microloans don’t carry the social baggage that borrowing from family and friends do. The terms of the loan are also set and won’t be changed. However, microloans are a formal loan so they will have a set end date and you won’t be able to change deadlines.
There are some drawbacks to microloans, however, lenders may charge you various fees for applying for the loan. There is also an application process which can take up to two or three weeks until funding, so they may not be the best if you need money fast.
Some microloans may have requirements that you may have to meet (i.e. they may only approve the funds for certain uses).
Microloans vs. Three Fs: What Are The Features?
To decide on which type of funding might be best for you, take a look at the features of each funding type:
|Microloans||Family and Friends|
|May be assigned financial advisors that can help you use the funds effectively.||May have more leniency with the terms of the loan.|
|Loans can range from $500 to $50,000.||Unless you have very rich friends, they likely will not loan you more than a couple of thousand dollars.|
|You can pay monthly or weekly, depending on the lender.||There are likely not specific repayment dates, but you will most likely pay back the loan within 2 or 3 years.|
|Interest rates vary from 5% to 20%.||There are often no interest rates, and if there are they are fairly low.|
Microloans vs. Three Fs: What Can They Be Used For?
Both of these types of loans are different in scope, and it follows that they both are typically used for different things:
|Microloans||Family and Friends|
|Signing a new lease on your office building.||Buying inventory and supplies.|
|Buying new equipment for your business.||Catching up on payments to staff.|
|Hiring new specialized staff.||Paying for hourly workers/temps.|
|Doing significant renovations to your workspace.||Doing smaller renovations.|
Microloans vs. Three Fs: What Are The Main Differences?
Microloans are your best bet!
To sum up, family and friends provide a more relaxed and informal loan but often provide less funding. For projects that require more significant funding, you may need to look into getting a microloan.
A Camino Financial microloan has more advantages than the ones offered by other lenders.
Our microloans are up to $75,000 with a repayment period up to 24 months and you can get the funds as fast as 2 days. Why not apply for a microloan today and reap the benefits of the investment?