Takeaways
- Microloans are smaller business loans designed for startups and small businesses.
- Microloans are issued in the range of $500 to $50,000, depending on the lender.
- Borrowers with limited credit history or poor credit apply for microloans.
- Peer-to-peer lending platforms connect investors and borrowers seeking microloans.
- Research the various peer-to-peer lending platforms, as they differ in their requirements, loan sizes, and fees.
What Are Microloans?
Microloans are small loans designed to help small businesses or entrepreneurs access the capital they need when traditional financing options are unavailable. Typically, microloans are offered to company founders, startups, or those with limited credit histories who might not qualify for larger conventional business loans. These loans are often used to support the start of a business, purchase business equipment, or provide working capital for daily operations. Although microloans can vary in size, they usually range from $500 to $50,000, depending on the lender and borrower's needs.
How Microloans Work
Microloans work much like traditional loans but on a smaller scale. You can get a microloan from nonprofit organizations, government agencies, and specialized lenders that provide them. One well-known program in the United States is the SBA Microloan Program, administered by the Small Business Administration. Through this program, approved lenders offer microloans of up to $50,000 to small businesses and nonprofit childcare centers.[1]
Loan terms can vary, but most microloans have repayment terms of up to 72 months, or six years. Depending on the lender and borrower's creditworthiness, these loans may have annual percentage rates (APRs) ranging from 8% to 13%.
>> Need Financing Options? Read the 9 Ways to Fund Your Startup
Microloans can support ongoing business activities, like purchasing critical inventory, supplies, machinery, or furniture. While they can help businesses grow, most lenders don't allow the proceeds to be used to pay off debts or buy real estate.
5 Steps to Get a Microloan
There are many ways to finance your startup. If you are considering a microloan for your small business, here are five key steps to navigate you through the process:
1. Assess Your Needs
Determine precisely how much money you need and what you will use it for. Microloans are ideal for smaller expenses, so ensure your financial needs align with the loan limits.
Smart Tip:
$13,000 is the average microloan used by the SBA microloan program.
When you borrow for your business, make sure you are securing enough money to accomplish your business objectives. Starting your first business is often more capital-intensive than founders anticipated.
Related: What Is an SBA Loan?
2. Find a Microloan Lender
Look for lenders that specialize in microloans. This could include nonprofit organizations, community development financial institutions (CDFIs), or SBA-approved lenders. Research their loan terms, interest rates, and eligibility requirements.
>> Is business booming? Consider Opening a Business Bank Account
3. Prepare Your Business Plan
Most microloan lenders will ask you to write a business plan outlining your goals, how to use the loan, and how to repay it. Be prepared to show your cash flow projections and any supporting financial documents.
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4. Apply for the Loan
Submit your application along with your business plan, personal and business financial statements, tax returns, and any other required documents.
Some lenders may also consider your credit score and personal background. To speed up the application process, you can gather all of this information ahead of time to reduce processing time.
5. Receive and Use Funds
If approved, you will receive the funds in a lump sum or as needed, depending on the lender. From there, you should use the money for the approved purposes and make timely principal and interest payments according to your loan agreement.
Pay your bills on time and in full to improve your business's credibility with lenders and access better financing terms.
Pros of Microloans
Microloans offer several advantages, especially for small or underserved businesses:
- Accessibility: Easier to qualify for compared to traditional loans, even with a limited credit history.
- Support Services: Many microloan programs offer business training, mentoring, and financial education to help borrowers succeed.
- Flexible Terms: Lower borrowing amounts and shorter repayment periods make microloans more manageable. They can be considered a payday loan, but for business purposes.
- Encourages Small Business Growth: Helps entrepreneurs launch or expand businesses without large-scale financing.
- Community Impact: Often provided by organizations supporting local economic development and disadvantaged groups.
Pros of Microloans
While microloans can be helpful, it's essential to consider their drawbacks. These include:
- High Interest Rates: Interest rates can be higher than traditional bank loans due to the increased risk lenders take.
- Limited Funding: If your business is growing quickly, consider another route, like trying to raise money from an angel investor.
- Collateral Requirements: Some lenders still require collateral, even for small loan amounts. Read more about secured loans.
- Time-Consuming: The application process can be detailed, and approval may take longer. Other credit product applications, like getting a business credit card, could be faster.
- Short Repayment Terms: Shorter terms mean higher monthly payments, which can strain cash flow. Review your business's finances to make sure you can make payments on time.
Alternatives to Microloans
If a microloan does not meet your needs, consider these other small business financing options:
- Business Credit Cards: These are useful for covering short-term expenses or smaller purchases, with the flexibility to pay over time. Read more about How to Open Your First Business Credit Card.
- Peer-to-Peer Lending: Online platforms where individuals lend money directly to borrowers, often with competitive interest rates.
- Grants: There are also non-repayable funds offered by government programs, nonprofits, or corporations to support specific business activities.
- Friends and Family Loans: Borrowing from personal connections can provide funds without strict terms, but be cautious about mixing money and personal relationships.
- Crowdfunding: Raising small amounts of money from many people, typically through online platforms, in exchange for rewards or equity.
Smart Summary
Microloans are small, accessible loans designed to help entrepreneurs and small business owners secure the funding they need to grow their companies. They are ideal for startups, businesses in underserved communities, or those with limited credit history. Microloans typically offer easier qualification and community-focused benefits, but they may not be right for every business.
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(1) U.S. Small Business Administration. Microloans. Last Accessed April 29, 2025.
