Microloans are best suited for small business owners or startups that have a thin credit file or can’t secure funds through a traditional bank.
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Loan Amounts
$500 – $50,000
Interest rates
6% – 18% APR
repayment terms
Up to 7 years
turnaround time
5 – 14 days
Pros
Cons
Microloans, also known as microcredit, are smaller loans to help disadvantaged or underserved entrepreneurs get financing to start or expand their business. Microloans may be made by nonprofit or for profit institutions, with typical loan amounts ranging from $6000 – $15,000. Credit requirements are often more flexible and startups may be able to get financing.
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Microloans are smaller loans often made by non-profit organizations (such as Community Development Financial Institutions (CDFIs) and other lending institutions with the goal of helping underserved entrepreneurs get access to capital. Some focus on certain groups of entrepreneurs, such as immigrants or veteran, women or minority entrepreneurs. Others may focus primarily on helping spur job growth in underserved communities and many focus on helping small business owners in specific geographic areas.
There is no legal limit on the loan amount, but the SBA microloan program has a limit of $50,000.
They may charge slightly higher interest rates than traditional bank loans, but less than other financing sources that may be available to entrepreneurs who fall in a higher risk category due to time in business, revenues and/or credit scores.
Microlenders often provide “technical assistance” which means they provide mentoring or entrepreneurship education to help the business owner be successful. Part of their goal is to help business owners build good credit and a solid financial history to eventually qualify for more traditional bank funding.
Each organization offering microloans will have its own loan requirements. Many are more flexible when it comes to the three main factors that most lenders consider:
The SBA Microloan program is flexible in terms of requirements. Each intermediary lender that makes these loans can establish its own lending and credit requirements. If borrowers have collateral they may be required to pledge it. (The SBA guidelines encourage lenders to be “creative” in their definition of acceptable collateral.) In addition, a personal guarantee will be required, However the SBA does not have a minimum credit score requirement and does not review the application for creditworthiness. The average SBA microloan amount was $14,735 in FY2019.
Similar to a traditional loan, you’ll apply for a microloan through the lender. However these organizations are used to working with borrowers who have had trouble qualifying for a small business loan and will usually make the process as simple and straightforward as possible. Often a staff person will work with you to help you fill out your application and give your business the best possible shot at success.
These loans typically come with favorable repayment terms. Most are shorter term loans (up to five years) though some larger microloans may carry longer terms.
The Economic Aid Act made a few changes to SBA microloan terms:
Interest rates are usually attractive and these lenders avoid predatory loan terms. The lender will try to ensure the borrower is able to afford the monthly payments.
Some well-known microlenders include:
These are just some examples of the lending options available to eligible borrowers through microloan lenders.
Ultimately, the best microlender is the one that can help your business get the funding it needs. The Association for Enterprise Opportunity (AEO) is a national trade industry association that advocates for the interests of entrepreneurs on Main Street USA and in communities across America. It has more than 450 members and partners involved in microfinance and microcredit across the U.S.
You can often find these programs locally through your Small Business Development, SCORE or other SBA resource partners. Locate your local partner here.
If you’ve hit a dead end trying to qualify for a loan through a traditional lender or online lender, or if you don’t need a large amount of money, a microloan may be a good fit for your business. Interest rates will likely be attractive and the loan will likely come with “technical assistance” to help make your business successful. Microloans can also be a great way to establish business credit if the lender reports payments to business credit agencies. It may take some digging to find the program that’s right for your business, but if you do, it can be an excellent way to get the financing you need to start or grow your business.
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