The title gives a clue as to who microloans are usually for – small businesses. If you run a small business venture and are hoping to grow, then setting the habits in place for solid financial management is essential. This is because a good indication that you are ready to grow is that the available funds become more than enough for the day-to-day running of a business. You can only know when that day has come if you are managing finances stringently from the beginning.
In practice, this means carefully managing incomings and outgoings, not to maximize profit but to ensure a healthy cash flow. Profits can only begin to be set aside for growth when there are no cash flow issues. A company’s cash flow represents the funds available at each point of a specified period of time – not just the total profits. Having funds available to meet financial obligations as and when they come along is what having a healthy cash flow is all about. Cash flow problems arise not from a lack of funds, but from funds coming in after they are needed.
Cash Flow Problems and Loans
If you have a small business with a poor cash flow, then this is a problem that needs to be managed before you can grow. The silver lining of a cash flow problem is that you know the full amount of funds required will eventually come in. Therefore, theoretically, you can always pay back any loans up to the amount of the total incoming revenue. Nevertheless, cash flow problems are typically reckoned over fairly short periods of time (usually one month) and therefore the loans provided to rectify them are typically small. Microloans are, as you might expect, a typical type of loan taken out by a small business in order to address cash flow issues.
Invoice factoring also deserves a mention as an example of the type of small loans that can be taken out to address cash flow issues. fastFACTR, a company out of Utah specializing in factoring invoices and the like, points out that they are not bank loans. Rather, the security for the loan comes in the form of an invoice provided by the company that has yet to be paid. The factoring service provides the amount stated on the invoice and then collects it when the invoice is paid. Many small businesses rely on such services for cash flow management.
What is a Micro Loan?
But what, specifically, is a microloan? A microloan is a small loan (usually between $500 and $50,000) that must be paid back on a short-term basis. We begin to see in this its use for typically short-term cash flow problems. This sounds like an obvious and pervasive solution to a frequent problem but, in fact, these types of loans are fairly rare, with most lenders in the U.S. not offering them.
For most businesses then, it appears as if invoice factoring is the best solution. However, where microloans are offered, they are typically offered by non-profit organizations with generous terms and reasonable interest rates. Such loans might work out very well for those companies in the right place at the right time – and it’s always worth searching.
Ultimately, microloans are good for quick bursts of capital that can be used for covering short-term expenses in lieu of income yet to come in. Just like factoring, they become less useful for larger projects, where a good credit history and higher profits are typically required.
Nonetheless, when you stop needing a microloan, you know you are on the right path.
