While there are many alternative definitions of what microloans are, the most basic definition is that they are small dollar-amount loans that are often used to assist small companies in growing their operations. Because microloans have historically been unprofitable financial products for banks in the United States, they have not been especially popular among finance companies.
On the other hand, alternative lenders are coming up with creative methods to assist small company owners while still earning a profit by providing these smaller-dollar loan amounts. The founder of the Grameen Bank was awarded the Nobel Peace Prize in 2006 for his efforts to assist budding company owners who were unable to qualify for standard bank loans because of their poverty.
His objective was to bring millions of people out of poverty by establishing the notion of giving “microcredit” to these individuals. He hoped to do this by promoting entrepreneurship. A thousand microlending groups have sprung up as a result of his idea, which has spread around the globe.
How does it work?
Developed to guide businesses that are having difficulty obtaining finance from traditional sources such as banks or credit unions, microloans are a viable option. Traditional term loans and peer-to-peer loans account for the majority of microloans. The lender provides the borrower with the whole loan amount. The borrower is responsible for making monthly repayments on both the original and any interest accumulated on loan.
Individual or institutional investors finance each loan via a lending platform in the case of peer-to-peer microloans. Borrowers will often be required to give an engaging personal or company narrative to spark investors’ attention in this kind of lending.
Nonprofit groups and government agencies offer the majority of microloan financing. This indicates that there may be limitations on how the loan may be used. The Small Business Administration (SBA) offers microloans that may be used for working capital, inventory purchases, and other similar reasons.
However, these loans cannot be used to refinance the current debt or to acquire real estate in the United States or elsewhere. In contrast, nonprofit and governmental microloan programs usually provide competitive interest rates and periods as well as a lower number of fees and other charges. In certain cases, interest-free microloan schemes are also available.
How to get a Microloan?
The organization that provides the loan determines whether or not you are eligible for a microloan. Borrowers with a strong or exceptional credit score who can put up collateral for a loan will be preferred by programs such as the Small Business Administration’s microloan program. Other companies, such as Kiva, do not base their lending decisions on a borrower’s credit score but rather on the borrower’s unique personal and company narrative.
In certain cases, specific categories of company owners are eligible for receiving loans, such as women entrepreneurs, veterans, low-income people, minorities, or farmers.
Microloans can be an excellent option for your company if you’ve been unsuccessful in your attempts to qualify for a loan via a traditional lender, and you don’t need an extremely big sum of money. Interest rates will most likely be competitive, and the loan will definitely be accompanied by “technical support” to aid you in making your company a success.