Small Business Microloans: What They Are & Where To Get Them

If you need a smaller amount of capital for business expenses, look no further than microloans — smaller loans of up to $50,000. In this post, we’re going to look at how you can use microloans, where to find them, and how to qualify. Keep reading for everything you need to know about micro business loans.

What Are Microloans?

A microloan is defined as a small loan that is for $50,000 or less. Microloans offer an alternative to traditional bank loans. These loans are for smaller amounts, so they are easier to qualify for, opening up options to small businesses that aren’t eligible for conventional loan options, either due to low revenue or lack of establishment.

How Small Businesses Can Use Microloans

Microloans can be used for nearly any business purpose, including:

• Inventory
• Supplies
• Equipment
• Office leases
• Hiring employees
• Working capital
• Startup costs & projects

Specific microlenders may have their own policies surrounding what expenses can be paid using loan proceeds, so make sure you understand these policies before accepting a loan.

Types Of Businesses That Can Benefit From Microloans

The businesses that would benefit most from microloans are smaller businesses with fewer employees and lower capital needs. A business that needs a large sum of money for a big expense, like purchasing commercial real estate, should consider other options.

Other businesses that would benefit from microloans include:

• Businesses that don’t qualify for traditional bank loans
• Startups & new businesses
• Women-owned businesses
• Minority-owned businesses
• Businesses in underserved & low-income areas
• Businesses with credit challenges

In addition to getting the funding you need, you can also improve your credit score by repaying a microloan. This potentially opens up opportunities for larger loans in the future.

Microloan Interest Rates

Microloan rates, repayment terms, and fees vary by a number of factors, including:

• Personal credit score & history
• Business credit score & history
• Time in business
• Collateral
• Type of loan

Most borrowers should expect to receive interest rates between 8% and 18%. Borrowers with a solid application may see lower rates, while other borrowers may see rates reaching 30% or more.

Microloan Borrower Qualifications

Borrower qualifications for microloans are much less stringent than they are for other types of small business loans. Requirements vary by lender, but there are a few general rules to remember:

• Small Business Requirements: Many lenders (including SBA intermediaries) set limits for the number of employees, annual revenue, and net worth of the business.
• Personal Credit Score: In most cases, you should have a credit score of at least 620. While some lenders may accept lower scores, interest rates will typically be much higher.
• Borrowing Limits: Borrowers can only receive up to $50,000. Many lenders have a limited amount of funding, so you may not be approved for the maximum amount.
• Loan Purpose: Borrowers must use loan proceeds for an approved business purpose.
• Collateral: Even if specific collateral is not required, a personal guarantee or blanket lien is typically part of the loan contract.

The 3 Types Of Microlenders

If a microloan is the right choice for your business, the next step is to find a microlender. There are three types of microlenders to consider.

How To Apply For A Microloan

If you’ve determined you meet lender requirements, it’s time to apply for a microloan. The application process varies by lender, but the process usually looks pretty similar across the board.

You will need to complete a loan application by providing personal and business information. In most cases, you also have to provide documentation with your loan package, including financial statements, bank statements, and financial projections. Some lenders may require resumes or a detailed business plan.

You may be required to provide information on collateral that will be pledged for the loan. If specific collateral isn’t required, you may still have to sign a personal guarantee.

Some microlenders require training, classes, or other steps before approving and funding a loan. Others may have requirements that must be met after receiving your loan.

Once all documentation is submitted and requirements have been met, the microlender will come to an approval decision. This could take just a few days (with alternative lenders) or a few weeks or longer (with SBA and nonprofit organizations). Once approved, the loan will be disbursed based on the lender’s policies.

Alternatives To Small Business Microloans

If you need a smaller loan, there are alternatives to microloans that could better fit your needs.

The Bottom Line On Microloans For Small Business

Microloans can provide much-needed funding for small businesses that have faced challenges when applying for other types of small business loans. While these loans can certainly help a business get off the ground or overcome financial hurdles, as with any loan, be aware of the costs of the loan to ensure there will be a return on investment and compare all of your options to ensure you’re making a sound decision for your business.