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What should you know before getting a microloan

For some new entrepreneurs, finding ways to receive initial funding can be a challenge due to myriad reasons: poor credit, lack of financial connections and more. That’s where microloans provide a valuable service.

Microloans, generally defined as loans of less than $50,000, are oftentimes the first source of capital for small businesses. They can help financially marginalized individuals by providing them with capital to launch their business and work their way toward independence. While microloans can be helpful, they come with risk. Interest rates are often high because the borrower doesn’t have collateral on their business.

In the United States, a lot of microlending is conducted by government-approved institutions, including the United States Small Business Administration, which operates the goal of spurring small business growth. While microloans can be a great way to launch a business with capital, there are some drawbacks to consider. Here are the pros and cons.

Pros

Build credit

Just like a person needs to build credit, so does a business. And if the person behind the business doesn’t have great credit of their own, microloans are a good source of capital. Because the sizes of the loans are often small — the United States Small Business Association reports the average microloan is $13,000 — high credit scores aren’t necessarily a prerequisite.  

Small amounts are also easier to pay back. But that also comes with drawbacks, like a higher interest, as we’ll get to down below.

Higher chance of approval

For business owners struggling to qualify for traditional loans, they will likely fare better with microloans. New businesses might not need much capital to start or they don’t want to go into too much debt, so microlending can be an ideal place.

In considering your application, microloan lenders can look at factors beyond your credit, including your ability to repay the loan and a solid business plan.

Cons

Higher interest rates

Because of low loan amounts, microloans come with high interest rates — sometimes as high as 8%. Rates aren’t as high as a credit card, but they are above what a typical loan would charge. That’s why it’s important to weigh the risks of microlending before diving in head first.

Lack of options

Many microloan lenders are limited to specific regions. Depending on where you live, you may find there are few local options for microloans.

NAWBO Member Q&A: Katelyn Soults

Katelyn Soults is the co-owner of Illuminated, a digital agency based in Waukee. Illuminated helps companies with better digital experiences through content marketing, software development and website design.

Soults has been a part of NAWBO Iowa for about two years. She’s active in the Waukee community, volunteering with the Waukee Area Chamber of Commerce, co-founding Waukee Young Professionals and graduating from the Waukee Leadership Institute in 2019. Also in 2019, Soults received the Waukee Young Professional of the Year Award.

Can you take me through your personal background?

I grew up in the suburbs of Cedar Rapids, in Marion, Iowa. I attended Linn-Mar High School and then moved to Des Moines to attend Drake University.

I studied magazine journalism, marketing and psychology while at Drake and graduated with a Bachelor of Arts degree in magazine journalism. As a student, I held a variety of internships around Des Moines and knew I wanted to continue living and working here as a young professional.

I currently live and work in Waukee and enjoy being active in the community, including the Waukee Area Chamber of Commerce. In 2018, I co-founded Waukee Young Professionals, a group that connects local young professionals and helps them make an impact in the community. I also graduated from the Waukee Leadership Institute in 2019 and recently received the 2019 Waukee Young Professional of the Year award.

What is your profession/business?

I co-own Illuminated, a digital agency based in Waukee. We help companies build better digital experiences through content marketing, software development and website design. I oversee the content marketing and website design divisions of Illuminated and run the company with my husband, DJ.

I am often asked how I can work with my spouse, but I never have a great answer. Working with my husband comes naturally to me, and I find it to be a unique and rewarding experience to share.

What is your favorite part of what you do?

It has been an absolute joy to work with local business owners and leaders to drive growth, create deeper connection with prospective clients, and bring automation and innovation to systems and workflows. With a journalism degree, I knew I had a love for words and the power of storytelling, but I didn't realize my passion for websites and user experience until the opportunity appeared. Now, developing digital strategies for websites is one of my favorite tasks!

Who is someone you consider a mentor, and why?

Karen Taylor, a fellow NAWBO member and business owner, is one of my most inspiring mentors. Her passion and enthusiasm for life and doing her best for others shines through her work and everyday interactions with others. I have found her encouragement and support to be particularly helpful while navigating entrepreneurship as a young professional.

Karen actually introduced me to NAWBO and invited me to my first NAWBO event in 2018. She is fantastic at bringing community to women and extending invitations to others.

If you could have a superpower, what would it be?

I wish I could teleport and travel around the world. There are many destinations on my travel bucket list, and I would love to be able to be in new places instantly! I would start with Maui, and then head over to France.