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Why Micro Loans Work for Small Budgets

The use of microloans by small enterprises and startups who have a small budget has become increasingly popular. The small businesses of the people who use these types of loans usually have no more than ten employees and bring in under $500,000 in revenue, and because of this they are often not able to obtain a traditional loan from a big bank. Instead, these small businesses are opting to seek loans from micro lenders. These micro lenders are non-profit and community-based organizations that give out small loans to those small businesses that are not able to receive financing from more traditional lending institutions.

How Micro Lenders Function

In most cases micro lenders are given money from local governments, philanthropic organizations or the Small Business Administration. In turn, these micro lenders give out loans to small businesses that have used up all of their lines of credit, are blocked from obtaining funding from big banks, or have completely maxed out all of their credit.

How Micro Loans Work

Micro loans are different than traditional loans from big banks in a number of ways. First of all, the amount that you can obtain from a micro loan ranges from about $10,000 to $50,000. However in some cases you can attain a micro loan for as small as $5,000 or as large as $100,000. Secondly, you cannot use a micro loan to purchase new property or to repay any of your existing debt. Instead micro loans are to be used for purchasing machinery, inventory, and furniture or for working capital.

Benefits of Micro Loans

When you have nowhere else to turn to a micro loan can help out your small business in a number of ways. If you have a solid plan in place in order to increase your revenue, and all you need is the funds then a micro loan may be exactly what is required to take your small business a step further. Additionally, you have a much higher chance of obtaining a loan from a micro lender as these institutions are much more lenient about who they loan money out to. No matter what your financial situation, a micro lender can potentially help you. In fact, even if you have horrible credit or no credit whatsoever it is more than likely that a micro lender will give you a loan to be used on your small business.

Drawback of Micro Loans

Be aware that micro loans typically come with a higher interest rate compared to a traditional loan. For a micro loan, interest rates are usually between 8 to 13%. On top of this, micro loans can only be leant out for a maximum length of 6 years. Due to this, you must ensure that you are capable of repaying your loan during this time, and you should not rely on the estimated revenue of your small business to do so as this can fall through. Also, be aware that a micro lender will require some type of collateral in order to give you a loan.