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Updated: August 3rd, 2023
When businesses need funding, they often turn to small business loans. While a traditional bank loan, like a term loan or equipment financing, can help with funding large-scale growth projects, there are other scenarios where a microloan may be a better fit. Here’s what you should know about how to get a microloan for small businesses and more about this type of business financing.
Microloans are small business loans that typically range from $500 to $50,000. These loans can be used by established businesses, but they are often favored by newer businesses that lack the revenue or credit history required for traditional forms of financing.
A microloan is generally designed for meeting smaller, short-term capital needs. These loans can be used by self-employed entrepreneurs, business owners seeking a low interest rate, or small businesses with only a few employees. Some microloan lenders specifically focus on serving low-income communities and underserved groups that have historically faced challenges in obtaining business financing, such as minorities and women.
Microloans follow the same general principles as other loans. You borrow a lump sum and repay that amount over time, with interest. Payments may be made weekly, biweekly, or monthly, depending on the loan provider.
There are two main microloan providers: the Small Business Administration and alternative financing companies.
Through its Microloan program, the SBA gives direct loans and grants to intermediaries and non-profit groups, which then lend money to non-profit childcare centers and small businesses, including minority, veteran, and women-owned businesses. The program offers microloans of up to $50,000, with the average microloan coming in at just under $14,000 in 2017. The maximum loan term for an SBA Microloan is six years.
SBA microloans can be used for startup expenses and working capital needs, as well as for purchasing inventory or supplies, furniture or fixtures, and machinery or equipment. However, using funds to pay off existing debt or to purchase real estate is not permitted
If you’re wondering how to get a microloan with the Small Business Administration, they have certain general eligibility requirements you’ll need to meet. Those include:
There’s also a size standard requirement for microloans. This is based on the number of employees or annual receipts your business has. Generally, to be considered a small business by the SBA, you must have fewer than 500 employees, less than $7.5 million in average annual revenue, and a net worth under $15 million.
While intermediaries determine what interest rate to charge borrowers based on a variety of factors including loan amount and planned use of funds, the SBA caps the maximum rate that can be charged — the cost of funds to the intermediary lender plus 7.75% to 8.50%, depending on the loan size. Interest rates typically range from 6.5% to 13%, averaging 7.5% in 2017.
The SBA doesn’t charge any fees for microloans. However, the intermediary lenders the SBA work with to administer and manage microloans for small businesses may tack on out-of-pocket closing expenses including:
These intermediaries also have their own credit and eligibility requirements which you must meet to qualify.
In addition to the SBA, you can find microloans from a number of institutions, including nonprofit organizations like Kiva and Accion. Each one has individual guidelines on how to get a microloan, who they lend to, how much they lend, approval requirements for loans, and repayment terms.
With some microlenders, like Accion, loan funding comes from the organization itself. Others, however, are based on a peer-to-peer lending structure. Kiva, for example, connects entrepreneurs with individual lenders through its platform to facilitate the lending process, but it doesn’t actually fund microloans for small businesses or other types of organizations.
Some microlenders focus exclusively on providing financing opportunities to minority entrepreneurs. For example, the Business Center for New Americans (BCNA) offers microloans for New York City-based small businesses owned by immigrants and refugees. These loans range from $500 to $50,000, with repayment terms lasting six months to three years.
The Minority and Women Revolving Loan Trust Fund is another New York-based program whose goal is helping women and minority entrepreneurs secure funding to grow their businesses. Qualified borrowers can get working capital microloans of up to $35,000 or fixed asset microloans of up to $50,000.
These types of programs are designed to make it easier for minority small business owners to secure capital.
Microloans can be used by virtually any business, but they may be more appealing for:
Microloans are designed to help businesses grow. What you might specifically use them for depends largely on your short-term needs and the type of business you have. Below are a few common examples of how a business owner may put a microloan to work:
Restaurant/food service microloans
Whether you run a small bistro or you’re hoping to open a popup bakery, there are certain supplies and equipment you’ll need to have on hand to keep things running smoothly. A microloan can help you pay for them while preserving your cash reserves.
Common use cases for restaurant microloans:
Salon and spa microloans
Similar to owning a restaurant or bakery, there are certain pieces of equipment that your salon or spa simply can’t operate without. If you’ve already found a space for your salon, the next step is outfitting it — and you can explore how to get a microloan to purchase the essentials.
Common use cases for a spa/salon microloan:
Yoga studio microloans
A yoga studio is a place to relax and leave worries at the door, but that may be easier said than done if you’re stressed over finding capital to equip your studio. With a microloan, you can check off the most crucial purchases on your list.
Common use cases for a yoga studio microloan:
If you think a microloan might be right for your business, there are a few things you’ll want to do before applying for one. First up: making sure you understand each lender’s eligibility requirements.
Every microlender has different qualifications they expect borrowers to meet. In general, you can expect a microlender to consider:
Ahead of applying for a microloan, it’s wise to review your credit report and score. This can give you an idea of how likely you are to qualify.
It’s also important to consider whether a microlender makes loans to any type of business or if they target certain industries or segments of business owners. For instance, a microlender may only lend to businesses that operate in a specific geographic area or industry.
One step you shouldn’t skip when applying for a microloan is preparing your business plan. You should be prepared to explain how your business makes money, who your business serves, your goals, and the action steps you’ll take to achieve them.
Loan terms, including the annual percentage rate, fees, borrowing limits, and repayment period are determined by the lender. Microloans for small businesses and other organizations can carry interest rates ranging from 5% to 20%, with repayment terms lasting as little as three months or as long as seven years.
Remember, with SBA microloans the maximum time you can take to repay a loan is six years.
As a business owner, you might be wearing twelve different hats on any given day. Funding Circle is here to deliver the business financing options you need quickly, so you can focus on what’s important — growing your business. And with terms from 6 months to 5 years, and competitive interest rates, we aim to make it as flexible and affordable as possible.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.