There are several types of loans available for entrepreneurs from financial institutions, banks, and other non-profit organizations.
These types of loans have different loan limits, loan requirements, and interest rates. An example of such a loan is a microloan.
What is it & How Does it Work?
As an entrepreneur seeking financial assistance, you must know the terms of the contract for various loans. What is a microloan? A microloan is a type of low capital credit extended to entrepreneurs to aid in starting up or running a franchise.
The Small Business Administration (SBA) classifies a microloan as any loan with a maximum credit limit of $50,000. The interest rates for most microloans range from 12% to 18%. Unlike traditional loans, microloans are meant to be repaid after a short period. The period is dependent on the agreement made between the lender and the entrepreneur seeking the loan.
Unlike traditional loans, microloans are less restrictive; therefore, more easier to acquire. An entrepreneur seeking a loan should visit a microloan office, and upon satisfactory meeting the loan requirements, the lender will remit the agreed amount.
Before remittance, there should be a written agreement on the terms of payment, the interest rate, and what will happen if you default in repaying the loan.
Who Should Consider Getting A Microloan?
Microloans are meant to support small business owners or start-up companies to begin their operations. Additionally, microloans aid in building an excellent credit score which will facilitate loan acquisition from traditional lenders.
According to Lantern credit, there are about 400 microloan offices in the United States. Microloans help the minority groups like women and people of color to start up their businesses. Conventionally, microloans are used to increase the working capital, purchase a piece of new equipment or furniture, pay employees, and offset seasonal debts.
Therefore, any business owner to a small business franchise is qualified for a microloan so long as the funds acquired are infused into the business. Note that microloans cannot be approved if they are meant to offset personal loans, purchase real estate, or pay for education.
How Do You Qualify For One?
Like any other type of loan, the loanee must meet specific requirements before acquiring a microloan. These include:
Proof of Existence of a Business or That You Plan to Establish a Franchise
For new entrepreneurs, a business plan is an absolute requirement if you are in the process of seeking a microloan.
A business plan describes how the business will operate and the business’ objectives. On the other hand, for existing entrepreneurs, a business registration license is a requirement.
Get Your Financial Books in Order
When seeking financial assistance from any money-lending organization, it is imperative to ensure that your books of accounts are in order. The latter will determine the credit limit, the terms of payment, and the payment period.
Ensure that You have Collateral
Collateral is a term used to describe assets whose ownership is temporarily taken by the lender to act as security of default in repayment of the loan. Upon full refund of the loan, the asset returns to the rightful owner.
Although microloans are easier to acquire, there is a need for the lender to secure the risk associated with default in loan repayment using collateral.
Conclusively, a microloan is the most suitable loan, especially for the minority members of the society seeking to jump-start or set up an enterprise.
Create a Financial Plan
A financial plan is absolutely necessary for every aspiring businessman even if not required by the lender. It tells how much money you need and where it will be spent. You might think that you already know that, but you probably only have an idea of the investment you need.
You will have a more in-depth understanding of where you should spend money and what portion of it.
With the plan, you would prioritize each investment and how it is going to benefit your business. This will also allow you to differentiate initial investment from the series of income you will need to keep the business running until it starts making profit.
You will need the initial investment right away, but you can wait or take another loan for the money you need every month.
A solid financial plan also increases the likelihood of getting a loan. The lender will review it and look for loopholes. If he sees that your plan has solid grounds, he will be more comfortable lending you the money. You are showing it to him that you will succeed in your business and will be able to easily return the amount.
This is also going to help you build good relations with the lender as it’s not the first time you will need a loan. The lenders also depend on people like you to take the loan, so they can keep their businesses running. They always welcome people with a good record who won’t cause any issues for them.
Helpful Resources:
- 5 Interesting Ways Startups Have Sourced Funding
- How To Raise Capital For Your Business?
- 20 Types of Small Business Loans Can Help your Startup in Trouble
Author: Jessica Davidson
