Using Microloans to Fund Big Goals
Picture Clyde, a budding young farmer who has developed quite the green thumb working for other people.
Recently, his uncle left him a piece of land. It’s got great soil, and Clyde is thinking of starting his own small farm there, allowing him to provide for his family and his community.
But while Clyde has the land and technical know-how, he can’t cover the cost of some of the equipment he needs. The machines shouldn’t be too expensive, but their price tags stand between him and his goal of starting a business.
Clyde hasn’t owned a business before and hasn’t established his credit. But he needs money, so he’s thinking of going to a bank to get a loan.
But is a traditional small business loan right for this hopeful farmer?
If, like Clyde, you only need a small amount of money to start your business, you might want to look at getting a microloan.
These loans typically help new businesses cover the price of new machinery or basic day-to-day costs. Though the amount of a microloan is generally less than a traditional loan, it can make a big difference for a small business.
Still, microloans can come with high interest rates. So before seeking out this type of loan, it’s important to make sure that it’s the right way to fund your particular project.
So how do you know if a microloan makes sense for you? Well, if you’re just starting out, a number of factors can make it the right option.
While lots of people have great business ideas, they might not know what it takes to run a business. Many microlenders, however, offer advice, resources, and expertise (as well as funding) to help people develop business plans.
There are even microlenders who will work with you to create a plan that helps your business grow in stages. That way, you can build your organization to the point that more traditional lenders – like banks – will be open to you.
Many first-time business owners also lack strong credit, so traditional lenders might find them too risky. But since microlenders only work with relatively small loans, it’s easier for them to take a chance on people with poor or no credit.
In fact, there are businesses that use microloans to build their credit. By paying back a small loan on time and in full, you can help establish a good financial track record. This can help you get larger loans from banks in the future.
Additionally, microlenders often have social missions. This means that communities such as military veterans, women, immigrants, people with disabilities, and minorities may find lenders looking to address their needs.
If you’ve looked at your situation and decided that a microloan is the right funding choice for your business, you need to know where to get one.
Many microlenders are associated with nonprofit groups, so see if there’s one that matches your particular goals. There are also governmental organizations that give short-term loans to help small businesses.
To find a microlender, look at online search portals like the Association for Enterprise Opportunity or the Microfinance Gateway. You can also ask businesses like yours where they’ve gotten their loans.
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Different microlenders can place specific restrictions on what you can or can’t do with the proceeds of your loan. Make sure you understand what a specific microlender offers before going with them.
While microloans often work for inexperienced business owners, it’s important to have some basic info about your project before applying for a loan.
Even if you don’t have a full business plan, many microlenders want to see that you’re competent and motivated. So know some details about your market, your potential customers, and why exactly you need funding to succeed.
You’ll also want to have a plan for paying your loan back. Try and project how much money you’ll be able to earn in a month, a year, and in 5 years. This will let you create a timeline for repaying your loan.
Lastly, know your credit score. If this is a new business or your credit is low, have a plan that will let you establish your business credit as quickly as possible, which can make it easier to find more funding in the future.
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While microloans can help lots of people start or expand their operations, they’re not right for everyone. Let’s take a look at your business and see if a microloan is the best choice for you.
KEY TAKEAWAYS
If you haven't established your finances or only need a small amount of money, a microloan can be a great alternative to a small business loan.
Microloans are generally offered by governments, community organizations, or nonprofit groups.
You can work with a microlender to develop a business plan and develop your credit.