Since the COVID-19 pandemic, businesses, and families have dealt with unexpected closures and losses, people were left to fend for themselves, and those who didn’t have access to banking turned to microfinance institutions for quick capital.
What are Microloans?
Microloans, often provided by non-profit organizations, are short-term small loans ranging from as little as $100 to $50,000. It is commonly used by small businesses and, in some cases, individuals.
Usually, larger banks in the United States do not provide micro-lending services because these types of loans are viewed as unprofitable. It costs practically the same to underwrite a million-dollar loan to a $50,000 one, making it not worth their time and energy.
There is also a more significant risk in lending smaller businesses money than larger ones because there is a higher chance they won’t be able to pay back the loan, making these banks think twice about lending their money. Because of their hesitance to loan out money, many small businesses are left frustrated after constant rejection.
This leaves room for microloans to flourish and help individuals who need quick and easy cash to stay afloat in the economy.
Purpose for Microloans
Microloans are intended to assist entrepreneurs who may have trouble attaining financing or want to launch or expand their business. The design of these loans has been crucial in helping increase the number of mom-and-pop shops worldwide by funding their potential growth.
While these loans are significantly smaller than what a million-dollar corporation would use, they are often useful for smaller businesses that need funds to buy inventory, office supplies, service machines, and even pay employees’ wages.
This allows for owners to make ends meet without breaking the bank. However, it isn’t uncommon for people to piece together multiple microloans to accomplish a particular goal.
Many microlenders also provide mentoring or entrepreneurship education to help guide a start-up business. Their goal is to be a stepping stone for business owners to create a better credit and financial history to eventually qualify for more traditional bank funding.
Qualifications for Microloans
Like any other loan, qualifying for microloans will often depend on the lender and its requirements. Since nonprofit organizations typically underwrite these loans, they are faster to attain than traditional business loans since they don’t have the same eligibility requirements.
Most microlenders want to talk to borrowers and understand their plans and efforts before lending them money. For the logistics, it is common for the lender to examine whether the borrower’s credit score is good or excellent.
Depending on the lender, the interest rates generally range from 0% to 13%, with a maximum repayment term of six years. While these loans are not as strict as traditional loans, the borrower still needs to pay back the money borrowed. Be wary, that failing to do so will ultimately result in a declining credit score.
Some standard organizations that offer microloan programs are Lendee, Kiva, and Accion, to name a few. However, among these organizations, Lendee differs from your typical microloan service.
With Lendee it focuses on a peer-to-peer lending basis and isn’t limited to just businesses. Since most microloans are intended for businesses, Lendee opens the gates of microlending to just about anyone.
Friends and family can lend money to one another, whether for a car payment, utility bill, or even dinner. With this service, no hidden interest rates are tagged onto the loans.
Overall, everyone may need a helping hand from time to time, and microloans offer a great way to cover your expenses.
