The 5 C’s of Credit — character, capacity, capital, collateral and conditions — is an old term that outlines what business owners need to have established to secure financing and grow. The Census Bureau reports that 5.4 million businesses were formed in 2021. Many of these new businesses haven’t had enough time to establish the 5 C’s of credit and therefore may be at a loss as to how to get growth capital and expand operations. The 5 C’s can be harmful to business owners because it gives the impression that they won’t be allowed access to funding without having all their ducks in a row.
At the same time, the Federal Reserve shows that 85% of business owners experienced financial hardship in 2021 and, with record-breaking inflation in 2022, small businesses are struggling to get loans from traditional banks and lenders at a time when they need it most.
All hope is not lost, however. Microloans are a tool that can knock down the barriers of entry in the marketplace with their accessibility and ability to improve business models, making the 5 C’s of Credit inconsequential. Microloans typically fall under $50,000, and can be incredibly impactful — especially for women, low-income and minority business owners.
Microloans can benefit small business in the following ways:
Cover expenses that lead to direct profits: For small businesses, these smaller loan amounts are a great way to expand operations by covering expenses that can be translated into a direct return on investment, such as advertising and marketing. To put it simply, a microloan allows business owners the freedom to use their current revenue to grow, invest in better equipment or improve staff’s wages and benefits, while using that small amount of borrowed money to reach new customers and grow future revenues.
Easily accessible: The process of applying for microloans is less stringent, meaning that the age of a business, credit score and available collateral aren’t factors counted against a loan applicant. For business owners who have not been operating for long or who have a shaky credit history, microloans can be a great option. Additionally, microloans are designed to dispense money quickly. Typically, applicants can get approved and funded in one or two weeks, which can save them from having to operate underfunded for multiple months.
A personal touch: Another unique aspect to this type of loan is many microlenders work with small business owners to ensure their business thrives. The goal behind microloans is providing qualified small businesses with fair, accessible funding, as well as training and educating. Not only is this a smart option to obtain business funding, but to receive mentoring, marketing and resources to support business growth and development. Existing businesses should take advantage of microloans to give a financial boost to grow and expand current operations while also learning to improve their business model.
Lend credit a helping hand: In the early years of a business, when the 5 C’s are still being established, it’s important to start off on the right foot by making loan payments on time and in full. Microloans are excellent opportunities to rebuild a poor credit score because interest rates can be as low as 7.97% and payback periods can be anywhere between 12 and 26 months. This allows business owners to keep their payments low and gives them ample time to pay their loan back.
Leveling the playing field: The small business world is fiercely competitive and can be daunting in the early years. In fact many businesses have failed without the funding typically only bestowed upon large companies with established track records. Fortunately, even if traditional lenders fail to help, business owners still have options. Microloans help level the funding playing field for traditionally disadvantaged business owners, especially women, veterans and minorities.
Rhett Doolittle is the CEO and chairman of Business Warrior, an open source technology company providing small businesses in the United States with a suite of data-driven marketing and next-generation funding solutions to boost local market dominance. Founded in 2014, Business Warrior is singularly focused on offering locally targeted lead generation marketing and funding solutions that fuel small business growth. By using next generation machine-learning and native software, Business Warrior has made growth funding and conversion marketing accessible for thousands of under-resourced and under-funded small business owners.
Did You Know: Data from online lender Biz2Credit showed that in February 2022, big banks approved 14.7% of loan requests — which was down from 28.3% in the same month in 2020. It’s no wonder that the 2022 JPMorgan Chase Business Leaders Outlook survey shows that small business leaders are increasingly seeking untraditional ways to reach their goals.
