Microloans are small-dollar loans, typically ranging from as little as $500 to $50,000, often designed specifically for small businesses that have a good shot at success, but are having trouble qualifying for traditional bank loans. Often made by nonprofit lenders, these loans can help new businesses, those with a limited credit history, and entrepreneurs in underserved communities, get the funding they need to get off the ground or grow. 

When Salt and Savour founder David Edmondson was growing his craft sauerkraut business, for example, he turned to microlender Kiva (more on them in a moment), first for a $5000 loan, and later for a second loan to continue growing. (Read his story here.) His business continues to flourish. 

Most microloan programs offer repayment terms between 3 to 6 years, with interest rates typically in the high single digits to low or mid-double digit range. While rates may be higher than traditional small business bank loans, these loans usually carry lower interest rates than other loan options with the same borrower qualifications. 

One of the main reasons entrepreneurs seek out microlenders is their accessibility. While banks will often require 2+ years in business and strong credit scores, microlenders frequently work with startups and business owners with lower credit scores. They may be more willing to work with low-income borrowers. And they  evaluate the potential cash flow of the business, rather than focusing just on credit history.

The funding microloans provide can cover inventory purchases, working capital, equipment financing, startup costs, and more. For example, a food truck owner might use a $15,000 microloan to purchase kitchen equipment, while a retail shop owner could use $25,000 to stock inventory for their grand opening.

The main providers of microloans for small businesses include:

• The Small Business Administration (SBA) Microloan Program, which works through local nonprofit lenders
• Community Development Financial Institutions (CDFIs)
• Nonprofit organizations focused on economic development
• Local and regional microlending organizations

Perhaps the main drawback is that small business owners may not know these loans exist, or how to find them. After all, a nonprofit lender isn’t likely to be using expensive marketing tactics to find customers. 

We’ll share tips for finding microloans in a moment. 

It’s also worth noting that there are microfinance programs that offer personal loans, but here we’re focusing on loan programs for small businesses.

How Do Microloans Differ from Traditional Loans?

Microlenders are community-based lenders, and they differ from traditional lenders (banks) in three key ways:

1. Purpose

Microlenders are community-based organizations that often provide business support services in addition to loans. Though they need to make loans that will be repaid (these aren’t grants), they have goals beyond simply profits. Because their first priority is supporting the community, nonprofit microlenders typically often offer more flexibility than traditional lenders. 

How are they more flexible? First, while personal creditworthiness will often be a factor (with a few exceptions, like Kiva), they may be more flexible in terms of minimum credit score requirements, especially for borrowers who have a limited credit history or who can show they have overcome past credit problems. 

Collateral requirements are often much less common with these small loans. Microlenders may look at the broader aspects of your business, rather than just your credit score or annual revenues.

This flexibility means that microlenders are often able to lend to businesses in industries that may not normally meet the qualifications of traditional lenders. For example, a microlender may be willing to lend to open a new restaurant or food truck business, where traditional lenders may be more wary of lending to these small business owners.

2. Value-added services

Microlenders do not just serve as a source of capital, but they also provide access to valuable services for small business owners. These services are usually referred to as “technical assistance”. 

Value-added services among microlenders vary, and may include training, helping you perfect a marketing plan, to one-on-one consulting. Loan officers may help you understand your credit, or help you get your finances in order to put together an individualized loan package.

For many borrowers, a microlender can act as a business mentor and offer sound, personalized advice about your business venture.

3. Financial terms

Microloan APRs are often a few percentage points higher than bank loan rates but usually better than the business owner may find on their own. (If they can find them—it’s often hard to find traditional business loans to startups.)

There’s even a nonprofit microlender that offers 0% interest loans! 

Terms are usually straightforward and easy to understand, with no prepayment penalties or hidden surprises. Still, read the loan agreement carefully and ask about any terms you don’t understand. 

A reputable microlender wants to see your business successfully pay back the loan, and will be happy to explain terms and conditions of the loan. 

Pros and Cons of Microloans

Pros and Cons of Traditional Loans

Traditional small business loans, including bank loans and many loans guaranteed by the U.S. Small Business Administration, bank loans remain the gold standard for established businesses with strong financials.

Most banks want to make larger loans. It’s not unusual for some bank loan amounts to start at $250,000—$500,000 or more as the minimum loan amount—and total loan amounts can reach into the millions of dollars. Interest rates are often among the lowest available, and repayment terms can extend 10 years or longer, resulting in lower monthly payments.

But qualifying for a bank loan can be challenging, especially for newer businesses and those without stellar credit.

Traditional bank loans often require at least two years in business, personal credit scores above 680, and annual revenue of at $250,000 or more. It’s also not unusual for banks to require detailed financial statements and collateral. The application process often takes 30-90 days, which may not work for businesses needing quick funding.

The approval rate for traditional bank loans hovers around 15% for small businesses. Even if you meet all the bank’s requirements, your application may be declined based on factors like your industry type or local market conditions. Restaurants, retail stores, and service businesses often face additional scrutiny, regardless of their financial strength. 

Though, to be fair, online lenders and non-traditional small business financing also often won’t lend to high risk industries either, or to charge high rates when they do.  

Most traditional small business loans report to business credit, often via the Small Business Financial Exchange. That means that regular, on-time payments can help build your business credit scores, potentially qualifying you for better rates on future financing. On the flip side, though, late payments can hurt your business credit profile.

Steps to Apply for a Microloan

Your first challenge is to find a microloan lender that’s a fit for you. These lenders often work in certain geographic areas (specific states or even specific cities) and/or assist specific groups of underserved entrepreneurs. (Most small business owners find them through referrals from local organizations.)

• The SBA publishes a list of microlenders who participate in the SBA microloan program here.
• The Opportunity Finance Network offers a CDFI finder tool you can use to find nonprofit lenders in your area.
• Accion Opportunity Fund, Kiva, and Grameen are well-known microlenders.
• Your local Small Business Development Center or SCORE chapter can often refer you to local microlenders.

Doing your research will take a little time, so take notes. A few good questions to ask as you reach out. 

Get your documents ready

During the loan application process, you may be asked for the following: 

• Business plan (even a simple 1-2 page version)
• Past 3 months of business bank statements
• Recent tax returns (personal and business if available)
• Basic financial projections showing how you’ll use and repay the loan
• Government-issued ID and business documentation
• Proof of business address and any licenses/permits

That said, if you don’t have a fully formed business plan yet, the microlender may be able to either help you create one or to point you to resources who can help. If financial projections and financial statements are intimidating, they may be able to help there too. 

If you have a business idea, but no solid plan for how you want to turn it into reality, you’re probably not ready for a microloan yet. Instead, consider working with an SBA resource partner such as a SCORE mentor or Small Business Development Center.

Know your numbers

Think carefully about how much money you need and how you’ll plan to use it. Be as specific as possible. Instead of saying you need “$5,000 for marketing expenses,” break down exactly how you’ll use the funds. For example: “$3,000 for paid online advertising, $1,000 for a local PR campaign, and $1,000 for traditional local advertising.”

Again, if you have no idea what these numbers should be, consider working with your own advisors, or get free help from a local SBA resource partner. 

Meet with your lender

Microloans often offer more personal experience than online business loans or other small business financing options. Often, you’ll meet with someone who will go over your application, your business, and your financial situation. This “high-touch” experience means they often make fewer loans than other lenders, and take longer to make decisions. 

Of course, individual experiences can vary, depending on the lender and their business model. Edmondson, the founder of Salt and Savour who we mentioned earlier, fully funded one of his microloan crowdfunding campaigns in less than a day. 

Review loan terms

If you get an offer, review it carefully before you accept it. Chances are terms will be very competitive as far as small business loans go, but you want to make sure you understand what you’re agreeing to. 

In addition to the APR, carefully review the terms. How much are the monthly payments? What happens if your business can’t make that payment? Is there a personal guarantee? (If so, you’ll be responsible for paying back the loan even if your business can’t.) 

Most of these loans carry little or no prepayment penalty, but be sure to check. 

Ask questions about anything you don’t understand. A reputable microlender will take time to explain all terms and conditions.

Complete training

Unlike a traditional loan, you may need to complete training before (or after) your loan is funded. These may include business budgeting or financial management workshops, business plan reviews and/or credit counseling. 

Look at these requirements as a bonus not a burden. They’ve been carefully designed to help small business owners succeed. 

When to Choose a Microloan vs. a Traditional Loan

Traditional bank loans make more sense when you need a larger amount of funding (at least $50,000 and often more), have a strong business credit profile, at least two years of business financial history, and strong revenues. While some banks make smaller loans, and/or startup loans, they tend to focus on established businesses. 

Bank loans typically work best for projects that require larger amounts of capital, such as major expansions, real estate purchases, or acquiring another business. A manufacturing company needing $200,000 for new equipment or a retail store ready to open a second location would benefit from a traditional bank loan’s lower rates and longer terms.

Consider a microloan if you need a smaller amount of capital, and have tried to get other types of loans and are running into roadblocks, due to bad credit or low credit scores, lack of time in business, or other common hurdles. 

Both types of loans may take a little while to get through the application process, so if you need smaller amounts of capital fast, you may want to explore a 0% intro APR credit card or other funding options that offer faster approval. (If you qualify.) 

Finally, keep in mind that microlenders often offer valuable assistance, including business planning and financial management training. If you’re new to business ownership or entering a growth phase, this support can be crucial. Traditional banks rarely offer these services but may provide more sophisticated cash management tools and business credit cards.

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Frequently Asked Questions 

What is considered a microloan?

Generally microloans are small loans (though there’s no legal definition), but not all small loans are considered microloans. For example, you may get approved for a $5000 limit on a small business credit card, and while that amount falls into the range for typical microloans, it wouldn’t be considered one. 

The defining characteristic of these loans is that they are aimed at helping individuals or entrepreneurs get the credit they need at fair and reasonable terms. They are usually made by nonprofit organizations that aim to help get loans into the hands of those who can use them responsibly, but have trouble getting approved. 

Are microloans hard to get?

Microloans can be easier to obtain than traditional bank loans. However, you will have to demonstrate to the lender that you have a good plan for using the funds so you can pay the loan back. (Again, these are loans, not grants, and must be repaid.) 

How do microloans help small businesses?

Microloans can give business owners a chance, when other lenders just say no. They support their loans with assistance to help the business succeed. 

What are the requirements for a microloan?

Just like with a traditional loan, each lender can have its own specific requirements, so don’t get discouraged if the first lender you contact isn’t a fit. (The SBA loans are a little different: lenders must follow the SBA guidelines when evaluating applications and granting loans under that program.) 

If you aren’t sure whether you may qualify, ask. Microlenders are often transparent about their eligibility criteria. 

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