What is a Short-Term Micro Loan?
A short-term microloan is a loan of less than $50,000 with a repayment plan of fewer than three years. While a $50,000 value and a three-year repayment is the maximum to be considered a short-term microloan, most short-term microloans are for $10,000 or less and are repaid in under 18 months. In the United States, these loans are typically only available to businesses, in several other nations these loans are used for personal financing. Short-term loans are typically issued quicker than long-term loans, this makes them beneficial for sudden unexpected costs, like medical expenses or an important piece of equipment in need of repair. Annual rates are typically higher, but, because the term of the loan is so much shorter, the loan usually has a lower total cost.
In general, short-term microloans have lower credit requirements than traditional loans. Both the short duration and the small size of the loan make it a lower risk option for lenders. Smaller loans are considered lower risk just because less is lost if they default. The shorter term of the loan also reduces the risk for the lender, because they do not have to rely on the stability of a business in the distant future. Lenders typically assess your risk based on a combination of your business and personal credit history. Some lenders have short-term microloans designed for startups, which rely only on personal credit history since most startups have little-to-know business credit history. The credit requirements for short-term microloans differ based on the size and type of microloan as well as the institutions which grant them. For the same reason that short-term microloans have lower credit requirements than traditional loans, smaller and shorter-term microloans have lower credit requirements than larger ones. Secured microloans typically have lower credit requirements than unsecured microloans. A secured microloan is a loan in which the lender offers collateral (something of value which becomes the lenders if the borrower fails to pay). Secured loans are considered lower risk because if the borrower defaults, the lender gets to recoup some of their losses. The Small Business Administration (SBA) backs some short-term microloans for small businesses. The backing of the SBA works in a similar way to collateral: if the borrower fails to pay, the SBA will pay back a percentage of the amount still owed. Sometimes, getting SBA backing has higher credit requirements then just securing a loan on your own. However, there are many circumstances that the SBA provides more leniency towards. The SBA may back a small business that is projected to create a lot of jobs, even if its credit history is a bit below the SBA’s usual standards. The SBA also backs loans for people from socially or economically disadvantaged backgrounds, looking at their credit history through the context of their situations.
Short-term microloans usually have significantly higher annual rates than larger, longer-term loans. However, these loans typically have a lower total cost than longer-term loans because they are paid off before they have had much time to collect interest. Since the underwriting costs for a lender are roughly the same for a large loan or a small loan, the lender needs to charge a higher % rate to make up for these administrative fees. The shorter term also increases the annual rate, since the fees need to be covered in a shorter amount of time. If a lender believes they have a lower risk of losing money, then they will offer lower rates. Secured short-term microloans tend to have lower interest rates than unsecured microloans. Borrowers with better credit scores may get lower rates than those who barely qualify. Loans that are backed by the SBA get lower rates as well.
For Bad Credit
Your credit history can be unforgiving, a small mistake from a long time ago can continue to affect your credit score. While short-term microloans are some of the easiest loans to acquire, even they have some credit requirements. The smaller the loan, the lower the credit requirements; if you have been rejected for a short-term microloan because of bad credit you may be able to qualify for a smaller loan to help rebuild your credit. You can also restore your credit by paying off some outstanding debt or getting a business or personal credit card.
Short-term microloans are very useful tools for financing a new business. Growing a startup typically requires a smaller amount of financing then expanding a well-established business. Short-term microloans are for a smaller amount of money, so they tend to have lower credit requirements. Many require no business credit history at all, relying solely on your credit. They are also inexpensive compared to other microloans since they are paid off before too much interest has accumulated. Short-term microloans are also useful for establishing business credit quickly, so you can apply for a larger loan once this one is paid back.
If you're looking to apply for a short-term micro loan but are in need of some guidance, doing some research or talking to an expert is a great way to lay out all your choices and get yourself on the right path for your finances.