What Are Microloans?
Microloans are very small, short-term loans with a low-interest rate, extended to self-employed individuals, new startups with very low capital requirements, or small businesses with only a few employees.
They are business loans of up to $50,000 that can be used to start or grow a business. Nonprofit organizations are the most common microlenders. Many of these nonprofits are mission-based, with a focus on lending to women, minorities, and other underserved entrepreneurs. Along with loans, many microlenders also offer free business mentorship, training, and assistance.
In this guide, we’ll walk through the top microloans available to small business owners, the qualification requirements, and how to apply.
How Do Microloans Work?
Microloans work like regular business loans, except they’re not issued by traditional banking institutions. Individuals, nonprofit organizations, or alternative lenders typically issue microloans.
Additionally, the purpose of a microloan is to provide entrepreneurs who otherwise wouldn’t be eligible for a business loan with access to affordable working capital.
As we’ll discuss in greater detail below, financing from the SBA microloan program, Kiva, Accion, and Opportunity Fund can all be considered microloan examples.
When to Use Microloans to Finance Your Business
Microloans are generally a pretty versatile loan product and can be used for a variety of business purposes. Sometimes, microlenders might place restrictions on your use of loan funds. However, they are usually a good fit for any small, short-term use of capital, including the following:
- Starting a new business
- Working capital to buy inventory or supplies
- Covering payroll or training employees
- Covering seasonal expenses
- Funding a new marketing strategy
If you’ve had trouble getting bank business loans, then you should consider microloans. Microlenders are often more forgiving in terms of qualification requirements, making them popular with freelancers, consultants, sole proprietors, and new business owners.
Microlenders can help you build credit and graduate to better financing products. As we mentioned briefly above, microloans are also a good choice for women, minorities, veterans, and others who’ve historically had difficulty obtaining funding.
The Best Microloans for Small Business Owners
When considering which microloans to apply for, it helps to start locally. Most nonprofits are closely tied with their local communities, and accept applications only from businesses within a specific state or region.
In addition, microloans typically have limitations. Many nonprofits rely on grants, donations, or government guarantees, so the number of loans they offer and the amount you can borrow can fluctuate from year to year.
These are some of the best microloans available for small business owners:
1. SBA Microloans
The SBA microloan program, administered by the U.S. Small Business Administration (SBA), distributes microloan funds to businesses through community-based nonprofit organizations. The government agency itself does not actually service loans directly to borrowers.
In addition to administering these microloans, these intermediaries also provide management and technical assistance to help borrowers launch or grow successful businesses.
Here are the primary features of SBA microloans:
- Maximum borrowing amount of $50,000
- Maximum repayment term of six years
- Interest rates vary by lender, but generally range from 7% to 13%
As with any other loan, your loan terms will be negotiated directly with the intermediary lender and will vary based on several factors— the loan amount, the needs of the borrower, the planned use of the funds, and the standards of the intermediary lender. The average SBA microloan was $14,735 in 2019 and had a 7.5% interest rate.
Though not required by the SBA, some intermediaries give preference to businesses that are minority or woman-owned, or businesses operating in financially distressed communities.
When you go to apply for a loan through the SBA microloan program, you’ll need to seek out a local intermediary lending organization through which to apply for your loan. You can contact your SBA district office to get started.
2. Accion USA
Accion is a global nonprofit organization with a mission to give people worldwide the financial tools they need to grow healthy businesses. The domestic arm of Accion, Accion USA, is the country’s largest network of local microlending organizations. Through its offices in nearly 30 cities across the country, Accion has provided nearly 50,000 loans, totaling over $450 million.
Microloans obtained through Accion work very similarly to SBA microloans, though funds are obtained through a wide variety of sources. The company maintains corporate partnerships with Citibank, Sam’s Club, and Samuel Adams Brewing (to name a few) and remains committed to providing entrepreneurship education to its borrowers and throughout the communities served by its national network.
Accion loans actually are available in amounts up to $1 million, so they are not only limited to providing microloans, but microlending is a big part of what they do.
To qualify, you need a credit score of at least 575, no bankruptcies in the last year, no foreclosures in the last two years, and no more than $3,000 in unpaid tax liens or court judgments. Startups must have a cosigner. Requirements can also vary slightly based on which Accion branch you apply with.
Another notable nonprofit microlender to consider is Kiva. Kiva works both globally and domestically, providing interest-free microloans of up to $10,000. The loans are paid back over a period between three and 36 months. In order to qualify, you must first have a family or friend lend to your venture.
The biggest benefit of the Kiva platform is that many of the microloans are interest-free. Individual lenders on the platform can crowdfund your loan with zero interest. Some loans, which do incur interest, come through Kiva’s partner organizations. Your ability to use these funds responsibly helps establish your business credit and build good borrowing behavior.
LiftFund is among the top intermediary lenders for the SBA microloan program. LiftFund is also a microlending powerhouse in its own right, lending over $210 million to small businesses in 13 states—Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, Tennessee, and Texas.
They issue loans from as little as $500 to as much as $1 million, but are very active in the microlending space. If you qualify for a LiftFund microloan, you can use the financing for just about any general business purpose—startup capital, inventory, equipment, real estate purchases and improvements, and more.
The only caveat is that if you’re funding a startup, you need to show that you have another source of income (e.g. spousal income or another job) to repay the loan.
LiftFund also requires collateral equal to the amount of the loan you are requesting. The primary disqualifiers are active bankruptcies and unpaid tax liens that aren’t on a payment plan.
5. Grameen America
Grameen America is a microfinance institution that makes microloans to low-income women entrepreneurs. Grameen has issued more than $1 billion in microloans to more than 100,000 low-income women across the U.S.
This microloan program might be a good fit for you if you’re a female business owner who is living below the poverty line and you need capital to start or expand a business. However, you should know that they operate in a unique way.
To work with Grameen America, you must first form a group of four other women that you trust and want to work with. Your group must then participate in a financial training seminar.
At the end of this seminar week, each woman in the group opens a savings account, and receives a microloan to build their small business. The group meets weekly to make repayments and continue with their business and financial education. The business loan interest rates start at 15%, with no additional fees.
A big advantage of Grameen America is that they report to the credit bureaus to help borrowers build their credit score over time and qualify for more financing.
6. Opportunity Fund
Our last recommended microlender is Opportunity Fund. Their mission is to provide business owners with small business loans, with a focus on business loans for women and minorities, who might not qualify for traditional financing.
They operate only in California and Nevada, with select loans offered in New York and Washington. You can qualify for between $2,600 and $250,000 in financing depending on the type of loan, and the loan must be paid back between one and five years.
The funds may be used for a wide range of business purposes, such as working capital, equipment financing, tenant improvements, commercial vehicle purchases, debt refinancing, opening a new location, acquiring another business, and more. Opportunity Fund’s process is fast—you’ll know if you’ve been approved for a microloan in three to five business days.
How to Qualify for a Microloan
Different microlenders have different requirements to qualify for microloans. However, most will evaluate your ability to repay the loan by looking at your credit score, business revenue, any other sources of income you might have, and the length of time you’ve been in business.
Here’s an overview of how to qualify for a microloan:
Step 1: Create a business plan.
Most microlenders will look to your business plan to determine the strength of your business model, decide whether you are serious about growing your business, and ultimately decide whether you qualify for a microloan.
Your business plan details the goals of your business, how your business makes money, what stakeholders, suppliers, and other sources you rely on to make your business function, and how you will reach customers for your business. It may sound complicated, but really, this is simply a formal process of writing out a lot of information that you likely already have.
Not only is formulating a written business plan an important exercise for the organizational health of your business—this document is also incredibly important in the microloan approval process.
Use our guide to learn more about how to write a business plan for funding.
Step 2: Clean up your credit report.
Compared with other small business loan products, microlenders place less emphasis on credit history. Because of the smaller loan amounts, microloans are seen as a startup business loans for brand new businesses with no credit history, or even for businesses bouncing back from bankruptcy.
Nevertheless, for your best chance at loan approval—and to qualify for the best possible interest rates—it’s worth the time and effort to make sure your personal and business credit reports are in top shape.
We suggest checking your credit scores and credit report and fixing any errors as a first step to improving your credit.
Step 3: Be prepared to offer collateral or a personal guarantee.
Because microloans are routinely serviced to businesses with no credit or poor credit, you may be asked to offer collateral or a personal guarantee in order to qualify. In the case of collateral, the lender will have you legally guarantee some valuable personal property, such as your home, as repayment in the event that you default on your microloan payments.
If you don’t own a home or other property that’s at least equal in value to the loan amount, you could be asked to sign a personal guarantee, which would allow the lender to seize any of your current or future personal savings, investments, or other assets as repayment for the loan.
Depending on your ability to provide collateral and your willingness to sign a personal guarantee, some microlenders might also require a cosigner before approving your loan.
Because you’re borrowing a relatively small amount of capital, however, the implications of offering collateral or signing a personal guarantee aren’t as overwhelming as they are for an entrepreneur signing a personal guarantee for hundreds of thousands of dollars.
Even so, it’s essential that you fully understand the terms of the agreement before you sign over collateral or a personal guarantee. Particularly if you’re financing a business with multiple owners, the terms can be confusing. If you’re unsure, have an independent attorney look over the business loan agreement with you before you sign.
Microloan Alternatives: Business Credit Cards
Microloans can be great options for newer businesses that need a small amount of working capital to get going. However, microloans can be hard to qualify for depending on the circumstances of your business and your credit score.
And, because some of the best microlenders work only with specific types of businesses, you might be out of luck if you don’t fit into their niche.
If you don’t qualify for a microloan, therefore, another good place to look for financing to cover small, startup costs is a business credit card. Business credit cards often feature high limits, relatively low interest rates, and the opportunity to earn rewards or cash back. There are different cards for different credit score ranges, and you can qualify even if you have a startup.
Here are some of our top business credit card choices for small business owners:
The Blue Business® Plus Credit Card from American ExpressGreat For: Making purchases with a 0% intro APR period
- 12 month 0% intro APR period on purchases from the date of account opening
- 2X points for the first $50K spent
- No annual fee
13.24% – 19.24%
- American Express Blue Business Plus: The American Express Blue Business Plus is best for businesses looking for a long 0% introductory period with flexible rewards earning potential.
- Capital One Spark Cash: The Capital One Spark Cash is best for businesses that want to earn one of the best cash back rates and don’t mind paying an annual fee after the first year.
- Capital One Secured Mastercard: The Capital One Secured Mastercard is a good option for business owners who need financing and want to build credit at the same time.
Use our guide to explore more of the best business credit cards for startups.
The Bottom Line
Microloans can be a great way to finance your business if you need a small infusion of capital or if you’ve been turned down for traditional financing options.
Several nonprofit organizations provide microloans, plus, the SBA microloan program is also a top source for this type of funding. With a microloan, you can give your business the jumpstart that it needs, build credit, and follow it up in the future with additional financing if needed.