Microloans provide financing opportunities for businesses that normally would be ineligible for traditional business loans because of financial hardship, poor credit, lack of access to financial institutions, or other restrictions. They are smaller and easier to qualify for than traditional business loans, offering loan amounts of up to $50,000 to businesses from specially designated intermediary lenders appointed by the Small Business Administration (SBA).
They serve as a financial tool to provide credit to small businesses seeking funding for business needs, such as start-up costs, obtaining working capital, or expansion funding. Applying for a microloan is a generally straightforward process and traditionally offers repayment terms of up to six years and average interest rates of 8% to 13%.
Who Is a Microloan Right For?
Microloan programs aim to aid new and small businesses, and while qualification criteria can vary, they provide an opportunity for an assortment of business needs. A microloan may be right for you if you:
- Have a small business looking to expand, rebuild, repair, or improve the business: Specifically, if your eligibility requirements are impacted by geographic location and low credit score or you’re simply seeking funding in a lesser amount than if you were applying for a traditional small business loan.
- Are self-employed: While the qualifications for obtaining a loan for self-employed workers can be more rigorous, microloans can help bridge the gap between business expenses and financial security.
- Have a startup seeking funds to cover operating costs pertaining to inventory, supplies, fixtures, furniture, or machinery and equipment: Since startups may not have a strong financial foothold, it may be difficult to obtain traditional financing. Microloans provide working capital in lesser amounts and often require fewer qualification requirements, providing an alternative to traditional startup business loans.
Microloans provided by the SBA are ineligible to cover costs, such as the payoff of existing debts and the purchase of real estate.
Pros & Cons of a Microloan
| PROS | CONS |
|---|---|
| Easier to qualify: Criteria for eligibility vary in favor of small businesses, usually requiring little to no collateral. | Loan amounts: Microloans have smaller capped loan amounts ($50,000) and shorter repayment terms in comparison to traditional business loans. |
| Flexibility: Funds can be used for a variety of needs, whether it be repairs, working capital, or equipment purchases. | Interest and fees: Due to smaller loan amounts and a shorter repayment period, interest rates and potential fees may be higher. |
| Quick financing: If you meet the requirements of the lender, funds are often dispersed quickly after approval, usually within a few days. | Eligibility: Depending on the credit requirements and decisions of the intermediary lender, qualifying criteria can vary. |
Qualifying for a Microloan
The microloan program administered by the SBA is open to all for-profit small businesses (and certain not-for-profit child care centers), with the purpose of promoting financial opportunities in a more accessible way. However, the application processes and requirements will vary depending on the lender.
Generally, while qualifying requirements are inclusive of businesses with low credit or limited funds, be prepared to provide documentation of financial information regarding both the business and your personal income. Lenders will factor in cash flow, outstanding debts, plans for your business, and the intention of the requested funds.
Here’s what you can expect:
General Qualifications of a Microloan | |
|---|---|
Credit Score | Usually a minimum of 620; varies by lender |
Collateral | Secured by collateral of choice and/or a personal guarantee |
Operating Requirements | Business plan, funding restrictions, and more; varies by lender |
Typically, lenders will have varying qualification requirements. However, their purpose is to facilitate financing needs in an accessible manner, providing you with an opportunity that you may have previously been restricted by.
Here’s what you should be prepared to provide your lender:
- A business plan: Your loan application will take into consideration the goals and character of your business. Therefore, a business plan may be required to showcase your proposal. That being said, your credit score does influence your eligibility to an extent, and a general rule of thumb for microlenders is to have a FICO score of at least 620 or above.
- Intentions for use of funds: Consideration of the intended use of funds will also be a factor in determining your eligibility. There may be restrictions placed by the lender on the usage of loan proceeds, so a detailed request and discussion with your lender during the application process can go a long way.
- Collateral: Since qualification requirements will vary by lender, it’s important to keep in mind they may request supplemental documentation to aid in their decisioning process after application submission. This can include requiring collateral to secure the loan, which in addition requires a separate process.
Time and documentation are needed to assess the value of the collateral, dependent on the asset. This may also be backed by the request of a personal guarantee, in which your personal income and credit history could be assessed. While either is not always necessary, it could make the approval process more lengthy if they are required. Communication with your lender can provide you with an estimated timeline of approval. Generally, however, the process takes anywhere from 30 to 90 days.
Rates & Terms of Microloans
Typical Microloan | |
|---|---|
Interest Rates | 8% to 13% |
Loan Amount | Up to $50,000 |
Collateral | Varies |
Repayment Period | Up to 6 years |
Disbursement Time | 7 to 90 days |
Loan amounts can be offered in amounts up to $50,000, with the average loan size around $13,000. If required, they are secured by collateral of choice, or often with a personal guarantee of the business owner. The repayment period varies, with shorter repayment periods than traditional loans.
It’s important to refer to your loan agreement and carefully read through the repayment or restriction terms. Before acceptance, ensure you communicate any outstanding questions or concerns to your lender.
Where To Get a Microloan
There are many microlenders available, each offering a variety of services that may be tailored to your specific business needs. When applying for a microloan, you should work with an SBA-qualified lender in your area, as it will set the terms in regard to your microloan. Visit the list of the SBA’s authorized intermediary lenders participating in the SBA’s microloan program to find one in your area.
Frequently Asked Questions (FAQs)
Microloans are utilized by startups, entrepreneurs, and small businesses as microloans are geared toward business owners with limited financial resources.
Microloans have more lenient qualifications, are generally geared toward disadvantaged populations, and provide smaller loan amounts. Meanwhile, traditional loans have higher qualification standards and often don’t lend small amounts of money.
South and Southeast Asia has the highest concentration of microfinance borrowers.
Bottom Line
Microloans are SBA-backed loans of up to $50,000, intended to provide financing assistance to small businesses seeking funds that otherwise may be inaccessible to them. The maximum repayment period is six years, with average interest rates of 8%–13%. These loans are accessible through a variety of intermediary lenders authorized by the SBA.
