What is a Microloan and How Can Your Business Get One?

Microloans are similar to traditional business loans — however, as the name suggests, they come in smaller amounts, typically up to $50,000. Microloans for small businesses can help business owners who’ve been denied funds from traditional banks, which are generally unwilling to lend small amounts of money.

If your business needs a micro-infusion of capital and you don’t qualify for bank financing, you may find success with microlending.

What is a microloan?

A microloan is a type of loan typically targeted toward those seeking a startup businesses loan, low-income borrowers or those with little or damaged credit history. It’s also a popular option for entrepreneurs from underrepresented communities, as well as anyone unable to qualify for conventional business loans.

Common microloan providers include nonprofit organizations and government agencies. Some lenders may have restrictions on eligibility and limitations on how funds are spent. That said, microloans often have flexible terms, lower interest rates and fewer fees than traditional business loans.

Microloan programs may also offer additional services not offered at a bank, credit union or alternative lender, such as entrepreneurship mentoring or business classes. In fact, your lender may require you to attend training sessions as part of your loan agreement.

Microloans for small businesses

A microloan provides a lump sum for business purposes — similar to a term loan. The specific rates and terms vary, but an SBA microloan has a maximum repayment term of six years. The USDA microloan, in comparison, has a 25-year term.

While microloans are available to any business that meets the lender’s eligibility requirements, certain entrepreneurs may be better suited for microlending as their primary form of business financing. For example, microlending tends to be a top choice for minority business loans.

Peer-to-peer microlending

Peer-to-peer lending (P2P) is a specific type of microloan available for small businesses. With a P2P microloan, you’ll receive funds issued by an individual or multiple funders instead of a bank. Typically, P2P financing is managed by a platform.

P2P investors select the companies and projects they’d like to fund. Therefore, you may generate more popularity among lenders if you have a solid business plan or an inspiring mission.

Microloan programs

You have many options to explore when looking to finance your business. Remember, the most significant difference between a microloan and traditional financing is the “micro” part. If you envision needing access to larger loan funds, you may want to consider other options.

Here are seven popular microloan programs to consider:

SBA microlenders

The U.S. Small Business Administration (SBA) guarantees microloans up to $50,000 made through intermediary lenders. The SBA microloan program’s goal is to help early-stage businesses in underserved markets, as well as nonprofit child care facilities. While credit requirements tend to be less strict than other providers, you’ll still need to provide collateral.

To apply with an SBA-approved lender, you can contact your local SBA district office or an intermediary in your area.

USDA FSA microloans

USDA microloans are reserved for small or beginner farmers, or business owners in niche sectors, such as farms selling directly to consumers or those using hydroponic or organic methods. The U.S. Department of Agriculture’s Farm Service Agency offers operating and ownership loans.

You can find the USDA microloan application online.

Kiva

Kiva is a nonprofit company offering peer-to-peer microlending, with a specialty in providing crowdfunded business loans in developing countries. For U.S.-based business owners, you can apply for a 0% interest microloan for up to $15,000 by proving your creditworthiness with contributions from family and friends.

Other peer-to-peer funding options include Peerform, Prosper and Funding Circle.

Upstart

Although Upstart offers small business loans from $5,000 to $200,000, you’ll have to apply for their personal microloan if you’re looking for smaller amounts. An Upstart microloan can be used for various purposes, such as credit card debt, moving expenses, medical costs and more. However, be aware that using a personal loan for business purposes won’t help you establish business credit and you’ll be personally liable for the debt you take on.

Accion Opportunity Fund

The Accion Opportunity Fund (AOF) is a nonprofit lender offering small business loans for diverse business owners. Funding is also available to ITIN-only borrowers, meaning that it’s a funding option for non-U.S. citizens. In addition, AOF provides extra resources, coaching and support in English and Spanish.

Grameen America

Grameen America, a nonprofit organization, disburses microloans to help women escape poverty through entrepreneurship. First-time borrowers can receive up to $2,000, with good-standing members eligible for larger amounts. The program includes a free savings account with a commercial bank, weekly meetings covering financial basics and support with building your credit profile. You must live within 15 miles of a Grameen bank branch to qualify.

LiftFund

LiftFund, also a nonprofit organization, offers business loans exceeding the typical microloan cap. Loan amounts range between $500 to $500,000. Whether you have limited credit, collateral or experience, the team at LiftFund is ready to help you build your business’s financial health. LiftFund’s small business loans aren’t available in every state.

Microloans: Pros and cons

Microloans could offer many benefits to borrowers, but they might not always be the best choice for your financing needs. Consider these points before seeking a small business microloan.

Eligibility for microlending

Each microlender sets its own business loan requirements to determine borrower eligibility. Plus, some microlenders may only work with businesses in specific geographic areas or industries, or business owners who fit specific demographics.

As already mentioned, the credit requirements for a microloan tend to be less stringent since the loans are aimed for small or growing companies. That said, the microlender can potentially ask for any of the following:

• Credit scores
• Business revenue
• Other sources of income
• Business plan
• The duration of time you’ve been in business

If the lender does consider your credit score, it’s usually in the overall context of the loan application. However, serious financial issues — such as active bankruptcy proceedings — may disqualify your business from receiving a microloan.

How to get a microloan

If you’ve decided that a microloan is the right move for your business, here are the general steps to get a business loan:

1. Review your credit history. Although microlenders tend not to rely on your credit score when reviewing your application, it’s still worth trying to boost your personal credit score. Try to pay down your debts and dispute any errors on your credit report before submitting a loan application.
2. Gather your financial documents. Organizing your financial records can help speed along the application process. If you miss anything on the loan application or forget to include pertinent information, your loan application may get denied.
3. Be prepared to provide collateral or a personal guarantee. A microlender may require borrowers to offer business assets as collateral to secure a microloan. In addition, a personal guarantee may be required, meaning you’d be responsible for repaying the microloan if your business defaults.
4. Compare options and rates. Review each lender’s terms and conditions to pick the best option for your business. Furthermore, try using our business loan calculator to see your borrowing potential, compare rates and get an overview of what you’ll pay in interest.

Investing in a microloan

Investing in microloans can be a way to diversify your income while helping budding entrepreneurs materialize their dreams. If you have limited funds, Prosper allows you to invest with just $25.

In general, microlending investing can produce high rates of return. According to Prosper, the average historical return for microlending investing is 5.7%.

Microlending tends to carry certain risks, especially if the borrower defaults on their loan. In addition, microlending platforms may charge investors extra fees, such as an annual loan servicing fee.

Other small business loans to consider

After weighing the pros and cons and the eligibility requirements of a microloan, you might decide you want a different type of small business loan.

Here are some other small business finance options to consider:

• Business line of credit: You can access revolving funds to help pay for a variety of business purchases with a line of credit.
• Working capital loan: Need extra cash flow to cover day-to-day business expenses? You can use a working capital loan for payroll, inventory, rent and more.
• Equipment financing: This loan can help your business purchase or upgrade equipment, including computers, vehicles and restaurant appliances.
• Short term loan: You receive a lump sum of cash, which can be used for a variety of business needs.
• Commercial real estate loan: If you’re considering purchasing real estate to expand your business, a commercial real estate loan can help.
• SBA loans: Backed by the U.S. Small Business Administration, an SBA loan can offer affordable rates with various loan amounts.