If you browse through an issue of Wall Street Journal, Inc. Magazine, or Forbes, chances are you would come across articles of hot startups preparing for venture capital funding.
Without doubt, there are plenty of ways various small businesses and startups can get their hands on funding involving a significant amount of money.
But what if you only need a small amount to help get your venture off the ground?
This is where a micro loan can come in handy.
In essence, micro loans are small and short-term loans with low-interest rate. This type of loan is often given to businesses with few employees or startups with minimal capital needs.
Benefits of micro loans
- Micro loans are often structured as installment loans. That means equal monthly payments should be made and length of repayment can range from a few months to several years.
- Some micro lenders act as counselors and help businesses device strategies, draft business plans, and understand their businesses before applying for a loan.
- Micro loans are provided in small amounts so business owners don’t end up borrowing more than they actually need. This setup will also help small businesses get in the habit of making prompt payments.
- Micro loans are sometimes granted to those with less-than-ideal credit scores (under 680) although the credit history will still be taken into account.
Qualifying for a micro loan
Standards required to qualify for a micro loan are generally lenient compared to other loan types. This is good news for those businesses that would like get their micro loans approved.
However, you can further increase your chance of getting the note by keeping in mind the following helpful pointers:
Ensure your credit report is favorable
Since micro loans often involve small amounts, lenders are not as fussy when it comes to the credit rating. In fact, this type of loan is deemed ideal for those who have no credit history or even those who are bouncing back from bankruptcy.
However, to boost your chances of getting approval, it will be best to keep your business as well as your personal business credit report in tiptop shape.
For starters, it will be ideal to get a copy of your credit report and ensure all entries are correct. Check for balances that are reflected as delinquent but were actually paid on time, or account that might have been mistakenly linked to your account.
Create a robust business plan
In most cases, lenders will use your business plan to gauge crucial elements like your determination to grow your business and the strength of your business model, among others.
For starters, a solid business plan should provide a clear insight as to your business goals, other possible sources you rely on, and how the business makes money.
While it may seem complex (and a lot of work), the process is actually very straightforward. In essence, see the process as just putting into writing whatever plans you have for your business and how you intend to make those plans happen.
Consider offering personal guarantee or collateral
If you can’t offer any collateral, you might be offered to sign a personal guarantee instead. It would mean the lender can seize investments, personal savings, and other assets if you are unable to make the payments.
While it may sound very risky, it’s not as risky as it actually is. Keep in mind that micro loans often only involve minimal amounts so it’s not as high-risk as signing a guarantee involving hundreds of thousands of dollars.