How To Grow Your Small Business with Microfinancing

Business.com / Funding / Last Modified: February 22, 2017

Whether you're an entrepreneur or an existing small business owner, you should be aware of the positive effects microfinancing can have...

As an entrepreneur you may find yourself having difficulty launching or growing your small business because you lack the funding you need. You may also have trouble finding and acquiring capital simply because you don't know your options. The good news is that it is possible to acquire the funding needed to launch or grow your small business.

The most important thing to know when searching for funding to capitalize your small business is knowing what options are available to you. Whether you're an entrepreneur who's just starting out or an existing small business owner (who has never had any type of business financing), you should be aware of the positive effects microfinance can have on your business. Microfinancing is a funding option that can be a great starting point to get your business funded. Microlenders typically work with borrowers that traditional banks won't bother with. Additionally the credit criterion for approval is less stringent that traditional banks so you're not ruled out if you have less than perfect credit. The loan amounts are small, usually between $5,000 and $20,000 (sometimes a little less or more). However, these small amounts of money can generate a big return.

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According to the Accion study, "U.S. Microfinance: Small Loans, Big Results," microfinancing has contributed greatly to job creation, business sustainability, growth, and income generation. The study was completed using the results of a survey that was conducted amongst microfinancing recipients. The recipients were awarded microloans in 2010 and surveyed in 2012 regarding the effects microfinancing had on their businesses during 2011, approximately one year after being awarded a microloan. Among other things, the study found that:

  • Approximately 54% of survey respondents hired an average of 5.6 employees after receiving their microloan.
  • Approximately 32% of respondents reported that their business income increased as a result of microfinancing. Furthermore, 41% of respondents stated that their income either met or exceeded their expectations.
  • Approximately 97% of survey respondents were still open after the first year of receiving their microloan.

Related: Get quotes from small business lenders.

In addition to the findings above, 43% of survey respondents stated they were seeking an additional loan to continue growing their businesses since they had experienced so much success with a microloan. This is significant because it shows that business owners often go on to borrow more money to continue growing their businesses. It's critical that as a business owner who borrows money that you understand two key points:

  • The importance of preserving your personal credit and treating it like an asset.
  • The importance of separating your business and personal credit.

Starting out with a microloan is the first step to acting on these two key points. Since a microloan is a small loan, it may be easier for you to manage than larger amounts of financing, especially if you are a first time borrower. Microloans enable you to get your feet wet in the business financing and borrowing world. Chances are that if you manage your microloan properly it will enable you to qualify for additional financing in the future.

Maintaining your debts properly and treating your personal credit like an asset early on will make it easier for you to borrow whenever you need it. Furthermore, you will find it easier to acquire capital under the business name and using the business credit instead of having to use your own personal credit. Lenders like to see that a business owner can manage their personal credit effectively before they extend them funding strictly under the business entity.

It's also important to remember that if you don't manage your personal credit properly it will end up becoming a liability instead of an asset. This will limit your borrowing capabilities in the future and could cripple your business growth in the long term. Many business owners tend to start off borrowing the wrong way because they don't manage their debt properly and they don't treat their personal credit like an asset.

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Managing your debt properly is as simple as using the debt for activities that are guaranteed to produce income and making timely payments until you pay the debt off in full. Do this and you will preserve your personal credit by protecting it from the damage that negative reporting can have on your overall credit profile. Keep that in mind when you decide to apply for your first microloan.

Manage your personal credit and your microloan properly now and you will find that the biggest benefit you get out of doing this is that -- you will always ensure that you give yourself the best possible chance of obtaining additional financing in the future to support your companies continued growth.

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