The Risks and Rewards of Microlending

Business Funding - 3 Min Read

While the concept of microlending is quite old, the web, together with the ongoing (and long overdue) diversification of the business lending marketplace has really changed the conversation. Today, microlending isn’t just viewed as legitimate, but for some businesses, it’s preferred.

However, just like all other kinds of business funding options, there are both risks and rewards – and would-be business borrowers need to clearly grasp both; particularly the former. Otherwise, their microlending journey could end up running into a brick wall.

The Rewards of Microlending

The rewards of microlending are straightforward: they’re generally easier to get than bank loans, since borrowers don’t have to meet stringent application criteria (e.g. perfect/near-perfect credit, 2+ years of credit history, collateral, etc.).

What’s more, many banks won’t even bother underwriting a small loan (e.g. $50,000), because the time investment is basically the same for a large loan (e.g. $2 million). As such, borrowers who have smaller working capital needs tend to dominate the microlending landscape. It’s not uncommon to see pitches between $5,000 and $25,000, though some can be significantly higher.

The Risks of Microlending

Naturally, there are some microlending risks; though some borrowers aren’t aware of them until after they’ve launched a campaign, and been disappointed with the experience and especially the results.

By far, the biggest risk is that the loan is by no means guaranteed. A number of lenders have to be interested in an opportunity for a funding goal to be achieved. And while several years ago the Internet-based microlending marketplace was new and there was a novelty about it, competition for funds today is fierce, and lenders are savvy, sophisticated and highly sceptical – especially because plenty of microloans have gone bust, and lenders have been left on the hook.

Another risk is that businesses that ultimately reach their funding goal (which as mentioned is not the majority of them) often have no relationship — personal or professional — with the folks who are lending them money. This lack of connection can turn into a problem if the business is unable to fulfil the terms of the loan, and needs to make adjustments (e.g. a loan extension, additional funds, etc.).

And of course, microloans aren’t cheap. In fact, interest rates can be well over 50 percent, which essentially puts them in loan shark territory. While this isn’t technically a risk since the numbers are known, it’s certainly a factor that has to be taken into consideration when evaluating the viability of microlending.

Our Advice

At Mulligan Funding, we believe that microlending definitely has a role to play on the alternative loan landscape – especially for solopreneurs and very small businesses that are doing unique work, and for which a bank loan is a virtual impossibility.

However, for most businesses, this option can be very time consuming, and there’s no guarantee of success. Instead, we invite them to connect with us and apply for a working capital loan.

Our working capital loans have high approval rates, and we don’t require collateral. What’s more, we provide a funding decision within 48 hours, and deposit funds within days of acceptance. There is also no need to submit business plans, as can be the case with microlending.

At the same time, we build strong relationships with all of our clients, and invite them to call or email us anytime to ask a question or obtain support. Unlike many microloan participants, we’re not nervous investors who are tapping into our personal savings in the hopes of turning $1000 into $1300. We are a privately owned company that services 100% of our loans from $5,000 to well into the 6-figures, and from durations ranging from a few months to up to a year. Investing isn’t something we dabble in – it’s what we do, and it’s all that we do. And if we say so ourselves: we do it very well!

Learn More

Call Mulligan Funding at 855-326-3564 to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.