A Small Business Guide to Microloans

Last updated June 20, 2025

Microloans are

of up to $50,000 that can be used to start or grow a business. They’re typically extended to self-employed individuals, new startups with low capital requirements, or small businesses with only a few employees.

Many mission-based nonprofits offer microloans, 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 explain how microloans work, when one may make good sense for your business, how to qualify, plus some alternative financing options in case a microloan isn’t the right fit for your business.

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How Microloans Work

Microloans work much like

business term loans

(pay back the borrowed amount, with interest, over a set period of time), except they’re not issued by traditional banking institutions. Community lenders, nonprofit organizations, and

alternative lenders

typically issue microloans.

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. These loans can be used to fund business ideas, expenses, or expansion.

When considering which microloans to apply for, it helps to start locally. Many nonprofits are closely tied with their local communities and accept applications only from businesses within a specific state or region.

When to Use Microloans to Finance Your Business

Microloans are generally a versatile loan product that can be used for a variety of business purposes, though some microlenders may place restrictions on your use of funds. Often, they are 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.

Microloans can also help you build credit and graduate to better financing products. They can be an especially good fit for

women

minorities

veterans

, and others who’ve historically had difficulty finding funding.

How to Qualify for a Microloan

Different microlenders have different qualification requirements. Most, however, will evaluate your ability to repay the loan by looking at three main criteria: credit score, business revenue, and time in business.

But because microlenders serve communities of borrowers that are already challenged in qualifying for more traditional business loans, they also tend to consider the full picture of a borrower’s financial standing and potential—meaning they tend to place less emphasis on a super strong credit history or several years in business.

Given that, here are a few steps you can take to strengthen your application for a microloan.

Step 1: Create a strong business plan.

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.

It’s wise to have a business plan no matter what type of financing you’re applying for, but especially in the case of

SBA microloans

, one of many highly desired

SBA loans

, lenders will look at your business plan to determine the strength of your business model, decide whether you are serious about growing your business, and ultimately help to determine whether you qualify.

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. But 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.

Then, you can follow our guide for

ways to improve your credit score

Step 3: Be prepared to offer collateral or a personal guarantee.

If you’re a borrower with no credit history or poor credit, you may be asked to offer collateral and/or a personal guarantee in order to qualify.

In the case of collateral, the lender will have you legally guarantee some valuable physical asset, such as equipment or inventory, as repayment in the event that you default on your microloan payments.

The lender may also ask you 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.

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

If you determine a microloan is not the right fit for your financing needs, or if you’re unable to qualify for one, consider these other options.

Business Credit Card

If you don’t qualify for a microloan, another good place to look for financing to cover small startup costs is a business credit card. Business credit cards often feature high limits 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.

Business Line of Credit

business line of credit

works a lot like a business credit card — draw from your total allowable credit amount as needed, only paying interest on the funds you draw down — and often comes with short terms (a few months to a few years), similar to most microloans.

Many online, nonbank lenders offer business lines of credit, and similar to microlenders, these lenders tend to have more flexible qualification requirements. So, they may consider borrowers with little to no business history and lower credit scores. Interest rates will likely be higher than you’d encounter with a microloan, however.

Crowdfunding

This option requires active and consistent work on your part to drum up funds for your business, but this can often result in building a network of interested and dedicated customers. Multiple crowdfunding platforms are available to help you get the word out about your small business and your funding needs. You’re likely to put in a lot of effort with crowdfunding to gain a modest amount of capital, but if you’re interested in a microloan in the first place, then this option may just net you what you need.

Fundera Can Help

We’re here to take some of the work of finding a microloan off your plate.

Answer a few questions—with no impact to your credit score and free of obligation—to see which loans you qualify for. We’ll advise you through the entire loan process, from comparing options to signing your agreement.

Let’s get you funded!