Both microloans and personal loans can offer small business owners a quick way to raise cash. These sources of credit have several common features. You don’t have to go through a complicated credit review process or provide tons of documentation to get a microloan or a personal loan. Additionally, these loans usually have to be repaid relatively quickly.
However, there are differences, as well. Typically, an entrepreneur would use the funds from a microloan for business purposes. A personal loan could be used for practically any purpose. Of course, you could use a personal loan for your business as well.
Let’s examine these loan categories in some detail and see which could offer greater benefits to a small business owner.
What are microloans, and what are personal loans?
A microloan is a business loan for a sum that could be between $5,000 and $50,000. Some financial institutions provide microloans for even smaller amounts. If you have launched your business recently or are having difficulty raising larger amounts of capital, a microloan can provide you with the funds you need.
A personal loan is different. When you apply for this type of loan, the lender probably won’t take a credit decision based on the performance of your business or the cash flows that it generates. Instead, the financial institution would consider two other factors: your personal credit and your personal income.
If you have poor credit or a level of income that does not meet the lender’s specifications, your chances of getting a personal loan approved are low.
Here is a list of the main features of these two types of loans:
⇨ Microloans are usually for a sum up to $50,000. The average microloan size is $13,000.
⇨ Funds from a microloan can be used for working capital, purchase of equipment, or buying inventory. Microloans can be used for other business purposes, too.
⇨ The interest rate on a microloan is usually higher than the rate on a small business loan.
⇨ The lender may require collateral or a personal guarantee.
⇨ These loans are aimed at borrowers who have low capital requirements.
⇨ A personal loan can be used for almost any purpose. The lender will not monitor how you deploy the funds that it provides.
⇨ These loans usually don’t require you to put up any collateral.
⇨ If you have poor credit, it’s unlikely that your personal loan application will be approved.
⇨ Personal loans usually don’t exceed $50,000. However, it’s possible to get a loan for a sum that is significantly higher than that. You could even get a personal loan of $100,000. It depends on your income level and your credit score.
⇨ Interest rates on personal loans can range from 5% to 23% or even higher. The rate would depend upon the borrower’s credit score.
This Venn diagram will help you to compare the features of a personal loan with those of a microloan:
When should you use a microloan and when should you use a personal loan?
If your business requires money quickly to meet an unexpected expense, should you turn to a microloan or a personal loan? To answer this question, you would need to take several factors into consideration.
As a general rule, it isn’t a good idea to treat your company’s money and your own funds in a similar fashion. There are risks to commingling, which is the practice of mixing your own cash with your firm’s money. If you use a personal loan for your business, the likelihood of commingling could be higher.
There’s another angle to consider. If you opt for a personal loan to meet your business requirements, the funds that you can raise could be limited. That’s because the lender will set the personal loan limit based on your personal income and credit score, and not on the potential that your business holds.
Here are some scenarios where a microloan would be preferable to a personal loan for your business.
Use a microloan when:
⇨ You need a small amount for your business, and you’re confident that you can repay in a few months.
⇨ You want to build your business credit history.
⇨ You don’t qualify for a traditional loan from your bank.
Use a personal loan when:
⇨ You have a high credit score and sufficient personal income.
⇨ Your business is new, and you can’t provide the lender with the documentation that is asked for in a business loan.
⇨ You’re confident that you will be able to separate your business accounting records from your personal transactions when you have to prepare your financial statements.
So, what’s your best option as a small business owner?
If your firm requires funds as soon as possible for buying inventory or for upgrading its equipment, a microloan from Camino Financial could be your best option. Our credit appraisal procedure has been designed keeping our motto – No business left behind – in mind. We don’t impose stringent rules on prospective borrowers.
It’s easy to qualify for a microloan from Camino Financial:
⇨ You don’t require a minimum credit (FICO) score.
⇨ Even loan applicants without a credit history are eligible to apply.
⇨ A business that has been established recently could qualify for a loan from Camino Financial. Your company must have been operational for as little as nine months.
⇨ Your annual gross sales should be $30,000 or more.
⇨ No collateral is required.
We offer microloans for sums up to $75,000, and prepayments don’t attract any penalty.
If your firm requires funds, apply for a business loan today. It takes just a few minutes to complete our form, and you’ll know immediately if you prequalify. Subsequently, our loan specialists will get in touch with you and guide you through the borrowing process. You could have the funds you need in a matter of days.