What Is a Microloan?

A microloan is a small loan — typically less than $50,000 — made to support small businesses, solopreneurs or new ventures. Microloans are often made by not-for-profits or government agencies like the Small Business Administration. In this article, we’ll explain how microloans work and help you learn if a microloan might be right for you.

What is a microloan?

A microloan is a type of small, short-term loan, specifically designed to help startups, small businesses and people who may not qualify for larger loans and that may be facing funding needs or cash flow issues. The definition of microloans is broad, encompassing different microloans like U.S. Small Business Administration (SBA) microloans, business microloans and online microloans. You might find these versatile financing tools are precisely what you need to kick-start or grow your business financing.

What's more, microloans fill a need that the best small business loans often can’t, particularly if your business is struggling to secure traditional financing. With their lower loan amounts, flexible usage terms and potential for additional supportive services, microloans can offer your business a more accessible and supportive lending option.

How do microloans work?

The application process for microloans varies depending on the type of loan and the lender. Before granting your loan, microloan lenders will generally analyze your business plan, credit history and prospects for success. While credit microloans are available if you have bad credit, the conditions and interest rates may be higher.

Some lenders, on the other hand, provide specialized microloans, such as SBA microloan terms for startups or microloans for women, with their own set of criteria and perks. Understanding these distinctions can have a big impact on your borrowing experience and, ultimately, the profitability of your organization.

How to get a microloan

Microloans can be a feasible funding alternative if you have a small enterprise or startup with little money. If you have a limited liability corporation (LLC), take a look at the requirements for the best LLC loans, as they may be a better fit. If not, consider microloans because they are smaller than traditional loans and can help business owners who may not qualify for more traditional financing options.

Follow these steps to get a microloan:

1. Improve your credit score

When lenders assess your microloan application, they take your credit score into account. A higher credit score might improve your chances of obtaining a microloan with better terms. Begin by reviewing your credit report for any inaccuracies that may affect your score. Paying your bills on time, lowering your debt burden and keeping your credit card balances low can also improve your credit score.

2. Have a business plan

Though not all lenders require one, a well-structured business plan could really help your chances of approval. This plan should clearly explain your company’s goals, strategies for reaching those goals and financial predictions. It gives lenders an idea of your company’s viability and capacity to repay the loan. To increase your chances of acceptance, make sure your business plan is clear, simple and persuasive.

3. Compare several microloan lenders

Every microloan lender has a unique set of loan terms, interest rates and qualification standards. Take the time to study and compare many lenders to discover the one that best meets your needs. The loan amount, payback periods, interest rates and additional costs are all factors to consider.

Also evaluate the support services each lender provides. Some lenders, like Accion and LiftFund, offer extra resources, such as business coaching, networking opportunities and individualized support throughout the loan process. Others, such as Grameen America, can help improve your credit score by reporting repayments to the credit bureaus Experian and Equifax. When comparing lenders, consider not only the financial components of the microloan but also the additional resources that can assist in the growth and success of your business.

4. Expect to provide collateral or a personal guarantee

Many microloan lenders require collateral or personal guarantees. The lender may use any assets owned by your company, like equipment, inventory or property, as collateral. On the other hand, a personal guarantee is a pledge that you (and the business’s other owners) will personally repay the debt if your company is unable to do so. Make sure you understand the implications of providing a personal guarantee before proceeding with a microloan.

5. Gather your business documents

Microloan lenders will likely require you to submit several business documents when you apply. These may include your business plan, financial statements, tax returns and bank statements. Having these documents ready can speed up the application process and increase your chances of approval.

6. Submit your microloan application and wait for approval

After you complete all of the necessary steps, submit your microloan application. Fill out the application completely and properly to minimize delays in processing. It may take some time for the lender to analyze your application and make a decision after you submit it. Be patient and, if necessary, contact the lender to inquire about the progress of your application. If the lender requests any additional information or documentation, provide it as quickly as possible to keep the application process on track.

The best microloan lenders

With so many microloan lenders to choose from, make sure you pick one that meets your business’s needs and financial goals. These are some of the best microloan lenders:

SBA microloan program

The U.S. Small Business Administration microloan program is a popular choice among business borrowers. This program offers loans of up to $50,000 to help small enterprises and nonprofit childcare institutions start and expand, though most microloans are under $13,000 in size. SBA microloans come with repayment terms up to six years.

The SBA collaborates with certified intermediary lenders to provide these microloans, and offers business-based training and technical assistance to help small businesses succeed.

Accion USA

Accion USA is a nonprofit organization devoted to empowering small company owners via economic opportunity. It provides microloans ranging in size from $5,000 to $250,000. Accion is notable for its emphasis on assisting underrepresented company owners, such as women, minorities and low-income entrepreneurs.

Accion’s services include loans geared to help your business flourish, with terms tailored to your company’s requirements and ambitions. It also gives you access to business experts, exclusive events, networking and opportunities from its partners.

LiftFund

LiftFund is a nonprofit company that provides microloans to small enterprises without access to commercial loans. It provides loans and resources to budding and established business owners, including minority-owned, women-owned and veteran-owned businesses. Its loan offerings range from $500 to $1 million, making it a flexible choice for enterprises of all sizes. However, its loan solutions are only available in the following states: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Missouri, Mississippi, New York, New Mexico, Oklahoma, South Carolina, Tennessee and Texas.

Kiva

Kiva is a unique microloan platform that operates on a crowdfunding model. With 1.9 million lenders, Kiva’s network has funded over $1.6 billion in loans in 77 countries. You can request loans up to $15,000, which can be funded by private lenders around the world. Unlike other lenders, Kiva doesn’t charge interest, making it a tempting choice if you’re just getting started and short on funds.

Kiva operates by allowing people to lend as little as $5 to entrepreneurs all around the world. Kiva borrowers have a 96% payback record, which is historically high for the company.

Farm Service Agency

The Farm Service Agency (FSA) is a branch of the U.S. Department of Agriculture that offers microloans to farmers and ranchers. The microloan program provides loans up to $50,000. Loans fall under two categories: Direct Farm Ownership, which lends money toward the purchase or improvement of farmland and Direct Farm Operating, which provides capital for a variety of aspects of farm operations from animals and tools to marketing and distribution.

Microloans primarily aim to meet the financial requirements of small-scale, novice agricultural businesses and unconventional farming activities. These include truck farming operations and farms engaged in direct selling and marketing at venues like farmers’ markets, Community Supported Agriculture (CSA) programs, restaurants and grocery stores. Microloans also support farms employing innovative cultivation methods like hydroponics, aquaponics, organic farming and vertical agriculture.

Grameen America

Grameen America, founded in 2008, is a nonprofit microfinance organization that provides loans, savings programs, credit establishment and financial education to female entrepreneurs. Its microloan program focuses on helping women whose incomes are below the federal poverty threshold build small businesses to create better lives for their families.

Grameen America provides microloans that start at no more than $2,000 and offers financial training and support to members. As part of its program, members open free savings accounts with commercial banks and make weekly deposits. It also reports microloan repayments to Experian, helping members build their credit profiles.

Microlenders vs. loan sharks

Microlenders and loan sharks get lumped together sometimes, but there's a world of difference between them. Here's how to tell them apart.

Loan sharks are essentially predators in disguise. These are their characteristics:

• Exorbitant Interest Rates: Loan sharks charge extremely high interest rates, often operating outside legal regulations.
• High-Risk Environments: These lenders prey on borrowers in situations with a high chance of default, making their practices even more exploitative.
• Illegal Activities: Loan sharks frequently resort to intimidation and threats to collect debts.

Microloans, by contrast, are a legitimate funding option. They offer these pluses:

• Supporting Growth: Microloan lenders provide smaller loans to startups and small businesses to help them grow.
• Reasonable Rates: While interest rates might be higher than traditional loans, they are significantly lower than those for payday loans.

Microloans are not the same as payday loans, either. Payday loans offer short-term, high-interest advances that can trap borrowers in a cycle of debt.

Before taking out any loan, always work with a reputable lender and thoroughly understand the terms and conditions. Make sure you can comfortably repay the loan before committing.

Summary of Money’s what is a microloan?

A microloan is a small loan, typically ranging from $500 to $50,000, that your small business can use to support its launch or expansion. These loans are particularly popular in developing countries because they give much-needed funding to enterprises without access to conventional banking institutions. Microloans are also sometimes used by U.S.-based startups, home-based businesses and enterprises in their early stages of development.

A variety of lenders, including nonprofit organizations, government agencies and online lenders, offer microloan products. While the interest rates on microloans can be higher than those on traditional loans, they offer a critical source of financing for small businesses and entrepreneurs. Before taking out a microloan, carefully research lenders, understand the terms of the loan and have a clear plan for how you’ll use the loan and repay it.