Different types of businesses need different types of loans, depending on their size and how much they need to borrow. Large and established businesses are more likely to be able to afford the repayments of larger loans, whereas small businesses cannot. That’s why they will usually opt for smaller loans that are much easier to pay back.
Microloans can go up to around £50,000. Small businesses, people wanting to make a second income and entrepreneurs will greatly benefit from this, as it’s extra help to get their company off the ground. Those who cannot qualify for traditional financing will also be able to secure a microloan.
If you’re unsure as to whether your business should choose a microloan for financing, you will find out all the answers here. We will explore the best types of businesses for microloans throughout this article.
Microloans for Small Businesses
As mentioned, microloans can be used to finance small businesses. This can help them further grow and expand, as the financial boost can help them pay for more assets and essentials. There are many different types of microloans that each have their own benefits for small businesses.
Business Line of Credit
A business line of credit is a type of microloan that can be used for a variety of purposes, such as equipment purchases, re-stocking and working capital. The biggest selling point of a business line of credit is that you only have to pay off what you use, so it can only be used when needed. However, if you don’t use it, you might then have to pay annual fees instead.
Business Loan Term
This traditional type of microloan can be used in similar ways to the business line of credit but is more often used for expansion. A huge advantage of this type of loan is that it offers fixed payments, so what you need to pay each month will never change. However, interest rates for this loan tend to be higher than the business line of credit loan.
Before deciding on which type of loan will best suit your small business, you need to have a clear understanding of what benefits you are looking for. Each type of microloan has different pros and cons, so you must conduct thorough research before committing to one type of loan.
Microloans for Startups
Entrepreneurs need to find the right kind of funding for their business so that it succeeds if they are not able to fund the project themselves. Microloans are arguably the most viable option for startup businesses, as bank loans can be difficult to obtain. These loans can cover several different aspects and help startup businesses purchase everything they need so that they don’t have to use up their finances.
Startup companies that have a non-existent or less-than-perfect credit history might also find it easier to obtain a microloan than a traditional bank loan.
Microloans for Businesses in Developing Countries
These types of microloans can provide access to capital for businesses in developing countries that might not be able to get traditional bank loans. Entrepreneurs will usually get microloans that are under $25,000 if their business is in a different country, as it is seen as more of a risk to expand it.
Microfinance Institutions (MFIs) usually provide these microloans to low-income businesses, and they’re non-profit organisations, so they tend to not have any outlandish rules or regulations. These loans are made to networks of borrowers who share mutual accountability. This strategy facilitates MFI to access rural communities while lowering the default risk.
According to studies, the GDP increases by $2.50 for every $1 invested in microfinance. This is so that microloans can contribute to the creation of revenue and jobs.
Microloans for Women-owned Businesses
While microloans are great for businesses owned by any type of person, they can be particularly beneficial for women-owned businesses. Recent data indicates that women entrepreneurs receive just $1 of every $23 in conventional small business financing. Let’s take a look at why microloans can play a big role for women-owned businesses:
- Investor Bias: Startup investors can be biassed towards male entrepreneurs thus making it difficult to receive funding from them as a woman.
- Fully Realised Potential: Since microloans are less biassed, the potential of women entrepreneurs can grow as they can get more financial backing.
- Bridge the Funding Gap: Microlending is considered the best way to bridge the funding gap and give women the money they need to succeed.
Microloans for Minority Business Enterprises (MBE)
Microloans can be a valuable funding option for minority-owned businesses in the US and UK. Unfortunately, MBEs have a harder time getting financial backing from traditional means like from banks. However, microloans offer a solution to this problem and can be lent to any kind of business owner.
There are a few things to keep in mind if you’re considering to get a microloan as an MBE:
- Find the right lender: You should aim to find a lender that specialises in dealing with MBEs to get the best deals.
- Plan what you need: You should have a clear idea as to what you are going to use the microloan for. This can help you with choosing an amount.
- Prepare to repay the loan: You must avoid missed payments and debt. If you can’t pay back your loan, you can apply for a DRO.
Microloans for Sustainable Businesses
Sustainable enterprises are a particular type of company that can profit from microloans. These companies are usually small businesses that prioritise eco-friendly operations. Entrepreneurs who are driven to make a difference in the world and are enthusiastic about environmental issues launch a lot of sustainable firms. Microloans can help with these green goals.
The funds can be used to invest in energy-efficient equipment, renewable energy, recycling programs and hiring green-thinking employees. Sustainable startups often need to rely on micro-loans, as they are seen as too risky an investment for banks to loan to. They can also be very helpful for businesses in lower-class areas or who have a set social mission.
Final Thoughts
Microloans offer a powerful financial tool for businesses of all shapes and sizes. Whether you’re a startup entrepreneur, a small business owner, or leading a sustainable initiative, a microloan can be the fuel for your venture, helping it grow and thrive in a competitive and worse-for-wear economy.
Take the necessary steps forward, research different lenders and compare their offerings. Once you have found the perfect microloan for your needs, something noteworthy is that if you encounter difficulties down the road, which is okay if they do, you can apply for a DRO.