What Is A Microloan And How Does It Work?

Microloans are small loans for businesses that need a non-traditional way to get funding. As the name implies, microloans are smaller than a typical small business loan (think “tens of thousands” instead of “hundreds of thousands”), which also makes them easier to qualify for when compared to traditional business loans. 

Many companies offer microloans, and many lenders and lending platforms exist online. The US Small Business Administration (SBA) also offers these loans through its own microloan program. 

If you’re building a small business, a microloan could hook you up with the funding you need to grow. Here’s what you need to know about microloans. 

What is a microloan? 

A microloan is a small loan, generally made to a small business. The average SBA microloan amount is about $13,000, though these loans can be as large as $50,000. Just like any other loan, microloans have to be repaid by a certain time and they also charge interest to the borrower. These loans have shorter repayment periods than traditional business loans, with a typical maximum term of six to seven years (some traditional business loans carry a maximum term of 25 years). Additionally, microloans may require you to put up collateral in addition to your personal guarantee (which is an agreement that you as an individual will repay the loan even if your business can’t).

Lenders have more lenient standards as to who qualifies for a microloan vs. a traditional small business loan, making microloans an attractive option for people with low credit scores or limited credit histories.

Microloan alternatives

The Blue Business® Plus Credit Card from American Express

On the American Express secure site

  • Rewards

    Earn 2X Membership Rewards® points on everyday business purchases up to $50,000 per year, then 1X point per dollar

  • Welcome bonus

    Earn 15,000 Membership Reward Points® after you spend $3,000 in eligible purchases on the card within your first 3 months of card membership.

  • Annual fee

  • Intro APR

    0% for 12 months on purchases from date of account opening

  • Regular APR

  • Balance transfer fee

  • Foreign transaction fee

  • Credit needed

A traditional small business loan

To get more than a microloan would allow you to borrow, a traditional small business loan like one through OnDeck could be a good fit. However, it is harder to qualify than a microloan could be — you will need a 625 credit score to qualify and to have been in business for at least one year.

OnDeck

  • Types of loans

  • Better Business Bureau (BBB) rating

  • Loan amounts

  • Terms

  • Minimum credit score needed

  • Minimum requirements

    In business at least 1 year, $100,000 annual revenue, business bank account

A personal loan

Depending on your tolerance for risk and the health of your personal finances, a personal loan could be your best choice for funding your business. Not every personal loan lender will permit you to use the loan for business purposes, so make sure you’re clear about how you intend to spend the money before you take out the loan. And remember that this loan is directly tied to your credit and finances as an individual, not as a business, so any problems with repayment will quickly take a toll on your own credit score and history.

CNBC Select ranked SoFi as one of the best personal loan lenders on the market. They currently offer personal loans of up to $100,000 (depending on creditworthiness) with no origination or late fees.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    8.99% to 23.43% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

What can microloans be used for?

Individual lenders set the terms of each microloan, but typically borrowers can use these loans to help grow a small business. This includes activities such as buying business supplies, new inventory and equipment and more.

While the restrictions vary by lender, the SBA microloans can’t be used for buying real estate, flipping a house or paying off other existing debts. 

Where to get a microloan

Like with any other loan, microloans can be obtained through a variety of lenders. Here are some of the more popular options for getting one of these loans. 

US Small Business Administration microloans

Microloans are issued by SBA-approved intermediaries across the country, which set the terms of the loans. Microloans through the SBA carry interest rates between 8% and 13%. They have a maximum repayment term of six years, which is a longer repayment period than some other lenders outside the SBA program.

USDA microloans

For those looking to fund small to mid-sized farms, the United States Department of Agriculture’s Farm Service Agency (FSA) also offers microloans.

The FSA offers two different types of farm loans: a farm operating loan and a farm ownership microloan. Operating microloans are able to be used for expenses related to running an existing farm, while ownership loans help with the purchase of a farm or land. Both operating and ownership microloans have a limit of $50,000, but it’s possible for a borrower to receive both types of loans for a combined $100,000.

Peer-to-peer microloan lenders

A number of peer-to-peer lenders operate online and help people to fund their small businesses with microloans. One such lender is Kiva, which CNBC Select ranked as the best small business loan option for microloans because you may be able to borrow without having to pay any interest. One caveat is that Kiva requires you to prove your creditworthiness on this platform by inviting friends and family to lend to you. It could also take time to receive your money since it pools together multiple small loans to fund your microloan. 

What are the pros and cons of microloans?

Whether a microloan is the right fit for your business can vary based on your needs and situation. Generally, there are some pros and cons to be aware of before you start your search. 

Pros of a microloan

  • You may be able to get credit, even if you normally wouldn’t. Even if you have a low credit score or may not be able to qualify for traditional loans, a microloan could help you get a start on your small business project. 
  • You won’t need to borrow more than you need. A full small business loan may be more than you need, though lenders vary on the minimum amount they’re willing to lend. If your project is small and doesn’t require a large amount, a microloan could help you avoid borrowing more than you need. 

Cons of a microloan

  • A microloan may not be enough to fund your project. Microloans are generally small loans — the SBA, for example, limits its microloans to $50,000. This may not be enough to finance some larger projects. And, it’s worth noting that there’s no guarantee that you’ll be eligible for the full amount you need for your project. 
  • Microloans generally have short repayment terms. For SBA loans, you’ll have a maximum of six years to pay everything back. 

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Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.


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