What are micro loans
Everybody may be familiar with microloan by hearsay. At any rate people THINK that they know what it is as it has become a bit of a buzzword in financial circles, thus many people are confused about what a microloan in particular is. Micro means something small, but anyway how big can be a microloan? Microloan is a very small, short-term loan at low interest rates and can be used for:
- machinery or equipment
- inventory or supplies
- furniture or fixtures
- or working capital
In a nutshell for the same purposes as any other loan with only one small exception – it can’t be used for debt repayments.
The average micro loan amount is $13,000-$15,000. However the amount can vary up to $ 50,000. Anyone can apply for it, although microloans are often given to entrepreneurs with bad credit or low money reserve: to those who were overlooked by traditional lenders.
How does micro lending work
Microlending was originally developed as a more winning alternative to loan sharks who were notorious for thriving on their borrowers. Such small loans are extended at an affordable cost with the goal of providing real opportunity to borrowers. The global average interest and fee rate is up to 37%. The highest rate was estimated once and it was 70%. This happens because of the high transaction costs.
There is some controversy as to whether the high cost of micro lending worth its purpose as a poverty fighting tool. There is one undeniable fact that borrower must make at least enough to cover the principal and interest on a loan to ensure that they do not finish even in worse situation as a result of accepting this type of credit.
Microloans make capital available in petty cash in such a way company does not loan more money than it needs — and so that it can get used to making the debt payments before it borrows more for expansion.
Micro loans can range from a few months to several years. They consist of same monthly payments of interest and principle rates. The providers of this type of credit often act as counselors and help the borrowers to draft business plans, map out marketing strategies, and make aware of their business before taking on debt.
Microlending in the U.S.
Before the most recent recession, micro funding was a limited concept to the developing world. Nevertheless, with the tightening of the credit markets and an increased demand for smaller loans, exigency in microlending has grown tremendously.
Microlending is internationally renowned for its speed and simplicity of approving, processing, operation and reasonable interest rates. 200 million among billion borrowers of micro loans are in the United States. Nationwide, not every financial institution offers micro loans with the average credit amount in the United States being approximately $13,000.
Most traditional financial institutions do not grant business loans under $50,000 because the profit is not there to make them worthwhile to offer. Most microlending programs in the U.S. provide loans of less than $35,000 to small businesses. The interest rate for microloans in the United States ranges from 5 to 18 percent which is higher than most bank loans.
Micro loans for small businesses
Every entrepreneur knows how difficult to get a loan for small businesses. Traditional lenders and financial institutions view small companies, restaurants, cafes, gas stations, beauty salons, car washes and many others as too risky as they may have not perfect credit that is usually considered as bad one because of short time of business performance.
Most of microfinance companies, or microlenders, offer specific micro funding programs for small businesses regardless of industry type, years in business (preferably more than 6 months), credit reputation, collateral and many other options. 800fund.com is an alternative lender that as well offers small business microloans.
Micro loans are sure thing helping many companies to develop faster both in the United States and globally. Yes, they are more for the entrepreneurs that are cash-strapped. They are truly for any business owner who understands that a small amount of cash can dramatically improve the expedience.