Many small business owners run into a lot of problems when looking for a smaller business loan.
While getting hundreds of thousands of dollars to put into your business is quite nice, sometimes business owners just need a few thousand for what they really need. When they apply for smaller business loans, they find that numerous lenders reject them for asking for loans that are too small.
Thankfully, there is a way to get a loan with a smaller amount of capital: the microloan.
Microloans in a Nutshell
How does a microloan work?
A microloan is similar to a business loan in practically every respect. The only significant difference is that microloans imply smaller amounts. Consequently, loan terms tend to be shorter, and interest rates can be higher.
How much money is a microloan?
It depends on the lender. For example, the maximum amount for SBA microloans is $50,000. Camino Financial microloans have a maximum amount of $75,000. However, small businesses typically borrow lower amounts. The average size is $13,000.
What is the purpose of a microloan?
Business owners can use a microloan to improve any aspect of their business that requires a small investment. The possibilities are endless: buying a piece of equipment, increasing inventory, launching a marketing campaign, etc.
What is microfinance, and how does it work?
The term microfinance encompasses several financing options for small business owners that need smaller sums of money (microloans being one of them).
But it also refers to different financial services that are provided to individuals who are unemployed or low-income, like savings and checking accounts, microinsurance, and payment systems. To have a better understanding of microfinance, we invite you to read “Microloan vs. Microcredit: What’s the Difference?“
What Defines a Microloan?
A microloan is typically a business loan for under $50,000, which is significantly less than a typical business loan. These are great for covering smaller expenses or getting just a little bit of an investment boost.
A microloan works just like a regular term loan, with the lender giving the full amount to the recipient and the recipient making monthly payments to pay back the principal of the loan along with any interest accrued.
Nonprofit organizations or government agencies typically give microloans, but some lenders like Camino Financial also offer microloans with easy applications and quick turnaround times.
Features of a Microloan
To get a better understanding of what a microloan really entails, below are a few features of a typical microloan when compared to a conventional business loan:
Interest Rates: The annual interest rates of a microloan tend to be higher than a regular loan. A microloan can have interest rates that range from 12% to 29%, while a typical business loan from a bank can have interest rates as low as 7% to 11%. You can compare here the different interest rates based on the type of lenders and types of loans.
Repayment Schedule: The lender and the recipient determine most repayment schedules, but in some cases, a microloan can have 1 to 4 payments monthly while a regular business loan will require monthly payments.
Length of Loan: Microloans are typically shorter-term loans that can last 1 to 5 years. A larger business loan will usually have a much longer-term, which can range anywhere from 5 to 7 years.
Loan Amount: Although the max microloan amount is $50,000, the average loan size is closer to $14,000 (much smaller than the average bank loan amount of $417,316).
Collateral: Collateral is what the recipient gives to the lender so that the lender has something that can be liquidated if the recipient fails to repay the loan. A traditional bank will require some form of collateral that covers the size of the loan, in the form of equipment, inventory, accounts receivable, or even your home. Alternative microlenders like Camino Financial won’t necessarily require collateral. However, putting up a smaller form of collateral (like the title of your car) may help you get better terms and rates.
Applying for a Microloan
In many cases, it is easier to apply for a microloan than a conventional business loan because they have more flexible requirements. In general, though, applying for a microloan will require the following:
- Financial Information: Lenders will need to see your personal and business financial information. Your current personal income, outstanding debts, and personal assets will determine whether or not you are likely able to pay back the loan.
- Bank Activity: Your lender will want to review your latest bank activity to look for evidence of strong cash flow. This serves as evidence that you have enough money available to pay back the loan. Online lenders like Camino Financial will ask for your authorization to securely download the last six months of your business banking transactions electronically. That way, they can gather the bank data they need to review your file and offer you the best terms.
- Money Required and Intended Use: You will need to let your lender know the approximate amount of money you will require and what you intend to use it for. Remember that there may be some restrictions in the uses and industries, like real state and car dealerships, since they are considered high-risk industries.
- Credit Score: While a strong credit score is a must when it comes to applying for a traditional business loan, micro-lenders can be more lenient on this point and don’t require someone to have a credit history. While no credit history is acceptable, bad credit, on the other hand, is a “no” when you apply for any type of loan. That means if you are considering applying for a microloan, but you have a low credit score, you should fix your credit issues and improve your credit score before approaching any lender.
- Collateral: Your lender will likely require some sort of collateral in case you cannot repay the loan. As we have seen above, some lenders will require collateral to cover the size of the loan. Remember that this requirement doesn’t apply to some alternative lenders like Camino Financial.
- Personal Character: The biggest difference between a regular loan and a microloan is that a lender will likely take your personal character into account for a microloan. Your lender will want to check your experience in the industry or the time you’ve been working in your business. Also, your criminal history may be consulted as part of the application process.
- Business Plan: Only nonprofit lenders will need to see your business plan, and especially if you are a startup. A business plan should include how you are going to use the loan and how your business will operate going forward. A business plan is not a requirement when you apply for a loan with Camino Financial.
Remember that the requirements to apply for a business loan vary from lender to lender and also depending on the type of loan.
Advantages and Disadvantages of a Microloan
- Flexible requirements including business size, profitability, documentation, and collateral
- Simple and quick process (with Camino Financial, you could receive your funds within 2 to 4 business days!)
- Some microlenders offer technical assistance to boost your business, and others may be willing to loosen restrictions and collateral requirements (especially if your business provides something important to the community).
- Don’t require a credit history
- Smaller loans amounts
- Higher interest rates than a regular business loan
- Shorter terms result in larger monthly payments
Access here a complete list of pros and cons of microloans.
Camino Financial Microloans
If you are considering a business loan to buy new equipment, renovate your store, or increasing your inventory, a microloan from Camino Financial can be a great choice. We offer unsecured business loans with fixed monthly payments through a paperless online platform.
These are some of the features of our microloans:
- Loan size range: $25,000 to $75,000
- Annual interest rate: 25.50% to 40.00%
- Loan terms: 24 – 36 months
- Uses: Primarily, working capital and equipment purchases
And these are some of the benefits of getting a microloan from Camino Financial:
- After 9 timely monthly payments, you are eligible to apply for more money at a lower rate and longer repayment terms
- Applicants with only an ITIN can qualify
- There’s no prepayment penalty
- 100% paperless and mobile-friendly process
- No collateral required
- Instant quote and funding in 2-4 days
All you have to do to start the process is submitting your online application, which won’t impact your credit. Soon after a business loan specialist will contact you to review your options, match you with the microloan that better fits your needs, and guide you through the rest of the quick process.
Apply today for a microloan and don’t miss the opportunity to grow your business!