If you’re a small business owner, you know that it can be challenging to get a traditional bank loan. You typically need significant documentation that proves you will be able to pay back the money that you borrow. You will also need a high credit score and an established credit history. No matter how confident you are that you will be able to repay, if your documentation doesn’t prove that you can- the lender is likely to deny your application.
If this is the situation that you’ve found yourself in, microfinancing may be an option. This type of funding is designed to generate income, manage risks, meet household needs, manage risks, and more. In this article, we’ll explain how to determine if microfinancing is the right choice for your business.
What is microfinance?
Microfinance is a way to fund low-income businesses that may have difficulty getting approved for traditional credit/lending options. This includes microloans, savings accounts, and insurance policies.
There are several lenders that offer these microloans, including nonprofits and banks/credit unions. The Small Business Administration acts as a liaison to get microloans to eligible borrowers.
Where Can I Obtain Microfinancing?
The best place to start your search for microfinancing is with the SBA, but you can also check directly with nonprofit organizations and banks. When you speak to a lender and get a small loan, they will likely also help you set up/maintain a savings account. A good lender will help you with the tools you need to pay it back.
How to Get Approved
While the lender ultimately decides whether you are approved or not, there are some things you can do to increase your chances of approval:
- Write a business plan
- Maintain good credit
- Offer collateral or a personal guarantee
- Invest your own money
Why Are Interest Rates Higher with Microloans than Traditional Loans?
Interest rates on microloans can vary compared to traditional loans, but are usually higher for a couple of reasons:
- Microfinance borrowers are high risk
- Microfinance loans are more expensive for the lender
While the rates are much higher than traditional bank loans, the lender will still review the borrower’s finances to make sure they will be able to repay.
Microfinance vs. Microcredit
Though they sound similar, there is a difference between microfinance and microcredit.
Microfinance covers a broad range of financial services for low-income communities and microcredit is funding for those who are below the poverty line. Microcredit is a subset of microfinance.
Conclusion
If you’re a small business owner, you know that it can be challenging to get a business loan. If you find yourself unable to get financing, a microloan may be a good option. Contact Rexford Commercial Capital if you are interested in considering a microloan for your business.
