Pros And Cons Of Microlending In The 21st Century
As the U.S. economy is finally starting to recover from the latest recession and the widespread bailout of banks, entrepreneurs and small business owners are beginning to see the light at the end of the tunnel. For many, this comes in the form of microlending.
What Is Microlending And How Does It Benefit Entrepreneurs And Small Business Owners?
While microlending dates all the way back to the 1990s, and microloans are specifically designed to help women, low-income individuals, veterans and minority business owners, the option has remained largely ignored – until now.
With a renewed interest in entrepreneurism as well as access to even more information and technology than ever before, entrepreneurs in the 21st century are quick to embrace the idea of microlending.
But what exactly is microlending? Most importantly, how does it compare to traditional forms of lending? Lastly, how does it benefit the typical entrepreneur or small business owner? In short, the U.S. Small Business Administration (SBA) established the microloan program as a means of bolstering small businesses and child care centers throughout the country.
The SBA and its intermediaries approved over 5,000 individual microloans in 2018 for a total of $76.8 million. According to their stats, the average microloan consists of $14,071 and carries a 7.6 percent interest rate.
Facts and figures like this are enough to appeal to even the most scrutinizing of business professionals, but it begs the question: “What are some of the pros and cons of microlending?”
Pros: Microloans Typically Carry Low Interest Rates
As highlighted above, entrepreneurs who secure microloans through the SBA can expect an average interest rate of 7.6 percent. Compare this other loans and credit lines and it’s easy to see how this is an advantage to any new business.
- Some of the most popular lenders charge anywhere from 7 percent to 25 percent interest. This includes Lending Club; one of the most popular peer-to-peer lending sites on the internet today, and Fundera; an online service that connects small businesses with various lenders.
- Many business owners turn to credit cards and other lines of credit to fund their initial startup, but current credit card rates regularly exceed 20 percent.
- It is possible to secure a microloan even if your business is relatively new and doesn’t have a history of generating profit.
When compared to the alternatives that are currently available, it’s no wonder why more entrepreneurs and small business owners are pursuing their microlending options.
Pros: There are plenty of options available
According to the SBA, there are currently 144 different microloan intermediaries – or partners – available as of 2019. Not only does this give you the opportunity to compare and contrast loans from a myriad of different lenders, but it guarantees that you’re working with a reputable financial institution.
Cons: Funds Are Sometimes Distributed Too Quickly And Loans Are Not Guaranteed
Most borrowers can expect the standard microlending process to take anywhere from 60 to 90 days. While much of this timeline depends on you and how quickly you’re able to complete and submit the necessary paperwork, the funds aren’t received instantaneously.
While they’re not instant, they are sometimes received rather quickly – with some reports indicating that the microloan was distributed too quickly. Other complaints center on the fact that microloans secured through the SBA are not guaranteed by a third-party.
Not only does this make it more difficult to qualify for a microloan than some of the other options, but it tends to result in interest rates that are above the average.
Cons: Limitations On Loan Amounts And How The Funds Can Be Used
Finally, there are some strict limitations regarding loan amounts and how the funds can be used. Before applying for a microloan, consider the following points:
- The maximum amount you can borrow through the SBA’s microloan program is $50,000 – but this number is rarely reached. Instead, the average loan amount fluctuates around $13,000 to $14,000. To secure additional funding requires you to prove your need for a larger amount, and that’s not always easy to achieve.
- Microloans through the SBA only cover certain overhead costs, including the necessary inventory and supplies to do business, relevant machinery, and furnishings. You can also use your microloan as working capital to support day-to-day operations.
In the face of such limitations, some entrepreneurs and small business owners would rather pursue other options. However, there is still a large portion of budding professionals who are in a great position to benefit from the SBA’s microloan program.
Finding Out More And Considering All Of Your Options
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