What’s the common denominator for starting a new business venture or expanding your current business? Money – lots and lots of money.
If you don’t have the capital to start the business or expand, how do you go about getting the money?
The first thing you might think of is a bank loan. These are great but usually for larger established companies who have continuous revenue and have good credit. If you have neither, or need to improve your credit, you might consider a microloan.
A microloan is a small business loan ranging from $500 to $35,000 provided by nonprofit organizations instead of a commercial financial institution. Should microloans be used to build your business credit? Below we discuss the pros and cons of microloans so that you can decide for yourself.
Smaller Amounts of Money May Be Borrowed
If you are trying to build up your credit taking out a huge loan isn’t always the best idea. With a microloan you wouldn’t be taking a lot out, just the smaller amount to get you to your next business goal or opportunity.
These loan payments are reported to the credit bureaus and if paid on time and paid off can increase your credit score the same as any other loan.
Gets You Used to Paying of Debt
This might seem to be a moot point, but if your business model has you purchasing inventory before you sell it or expanding or aggressively growing, you’ll most likely need a loan at some point. Of course, it’s always best to avoid debt whenever possible, but a microloan is a good test to see if your venture can pay off debt without bankrupting the company. Little bites are how you eat the elephant, not by swallowing the leg whole.
Easier to Obtain
If a bank denies you a small business loan, you may have better luck with a microloan. Sometimes banks don’t want to take the risk of a smaller loan on a business that has no credit. It’s easier to get and pay off a $5,000 loan than it is to pay off a $50,000 loan. There are microloan programs for startups, minorities, and other niches. Keep in mind these loans are made specifically for small businesses.
Microloans Are Still Debt
Microloans are still debt. If you are looking to grow your business but can’t currently sustain what you are doing, a loan may not help you. Defaulting on the loan will hurt your credit further and make it harder for you to build up that score or even apply for more loans in the future. Plus, any debt you take on must be paid back eventually.
Higher Interest Rates
Though geared toward small businesses, microloans still charge interest. The interest tends to be higher than standard business loans. But it’s decidedly lower than if you used a business credit card. Microlenders will work with the small business to generate business plans and provide some feedback, your credit cards won’t.
Talk with your financial planner or business accountant to see what the best options are for you and your business if you need a loan. Credit scores are needed for everything but even if your credit score is low, you may find a microloan that fits your needs. If you don’t have business credit you might not be eligible for a business credit card and thus not help your credit. Microloans can help you build credit while starting or growing your business. Just make sure you weight the pros and cons first.
Have you ever had to take out a business loan? Did you consider a microloan?
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