What is a Micro Loan and Can Your Business Get One?

  • A micro loan is a small business loan intended for startups, self-employed individuals, or businesses with just a few employees.
  • These loans tend to have higher interest rates and shorter repayment terms than traditional loans, but can be easier for small businesses or startups to get.
  • Many microfinance or micro loan programs are aimed at underserved communities who don’t have access to other types of financing, including non profit organizations. 
  • The U.S. Small Business Administration (SBA) provides micro loans, but there are many other micro loan programs available. 

What Is a Micro Loan?

As the name suggests, a micro loan is a small loan — usually less than $50,000 — intended to help startups, self-employed entrepreneurs, or small businesses with just a few employees cover their business expenses. Micro loans have shorter repayment terms than traditional small business loans, which means they may have higher interest rates so the lender can recoup their investment. The loan amount will depend on your needs, but the average micro loan size is $13,000. 

Micro lenders tend to be individuals, so instead of applying for a traditional loan through a lender like a bank or a credit union, borrowers are connected with individuals or smaller financial services companies who lend out small amounts of money. Many of these microlenders are interested in specific types of businesses or startups, especially those with social or community-oriented goals, like nonprofits. 

What Do You Need to Qualify For a Micro Loan?

The eligibility requirements for micro loans can vary from lender to lender, but they are often less hard to meet than those of traditional loans. A few general requirements include:

  • Average or better business and personal credit — this may be good news for you, in that you won’t need excellent credit to be eligible for a micro loan. Many lenders will accept an average credit score, both from your personal and business credit. If you have poor or no business credit, now is a good time to learn how to establish business credit. 
  • Collateral and/or personal guarantee — because micro loans tend to be available for riskier, newer organizations, you may have to provide collateral or a personal guarantee for repayment. This could be equipment that you use or your business itself, as well as personal collateral like your home or car. 
  • Business history — although some micro loans are meant for startups or entrepreneurs who are just starting out, some will require proof of at least some business history. The SBA-backed micro loans in particular will probably require at least two years of business history, which you can prove through your tax returns. You may also want to provide a business plan or other proof of your annual revenue. 

Other micro lenders may have other specific requirements for you to apply, too. Your organization may need to be a member of a certain nonprofit community or provide 

Why Are Micro Loans Useful?

Micro loans are great for small business owners that need some help but don’t need a big traditional loan or don’t qualify for one. Many micro loans are aimed to help underserved business owners or entrepreneurs who would otherwise have a difficult time accessing traditional funding. Lenders may also provide additional resources like training or coaching to help you with your small business. 

They tend to have less stringent application requirements and a less complicated application process, so they’re great for busy entrepreneurs or small business owners who don’t have a lot of headspace to work on a longer loan application. 

You can use a micro loan for any number of business needs, including:

  • Opening up working capital or cash flow
  • Purchasing inventory to sell
  • Purchasing supplies or equipment, including furniture, machinery, and even computers

In general you cannot use a micro loan to pay off other debt you already have or to buy real estate. 

What Are the Disadvantages of Micro Loans?

In terms of the financing options available to small businesses, micro loans may not always be the best choice for a number of reasons. The first is high interest rates. Because micro loans are usually short-term loans with repayment terms of three to five years, and because they tend to loan out to borrowers who may not have the best credit, they can have very high interest rates — up to 30% or more. While SBA loans tend to have a rate of six to nine percent, not all micro lenders can offer these kinds of terms.

Another issue that borrowers may encounter with micro loans is that the repayment amounts are higher than a traditional loan might be because of the short repayment terms. Also, you can’t get a large sum of money from a micro loan, so if you have larger projects in mind, you may not want to pursue one. They may also take longer for the application to process or to receive the funds, even though their application processes are shorter or less complex. 

Because micro loans tend to go to borrowers that traditional lenders may consider “risky,” you may be required to supply collateral or a personal guarantee in order to qualify. You may also face restrictions on what you can use your micro loan for, especially if you apply with lenders who work with specific social causes. 

It’s important to find the right lender for your needs to ensure you have a financial institution or other micro lender who meets your needs. You may find that a bank loan or other type of small business finance will better suit your business requirements. 

Micro Loan Marketplaces 

There are several marketplaces where you can search for a micro loan that suits your needs. 

Kiva micro loans

Kiva is a purely online lender that aims to connect entrepreneurs with online lenders. They’re particularly focused on borrowers who might not be able to access affordable sources of credit. Using crowdfunding from around the world, they provide loans for entrepreneurs in more than 80 countries. 

Accion Opportunity Fund micro loans

Accion Opportunity Fund is a micro loan marketplace that aims to provide support for small businesses while advancing racial, gender, and economic justice. They offer coaching and networking on top of their access to capital, and work with lenders in both English and Spanish. 

Small Business Administration (SBA) micro loans

The SBA manages a micro loan program that connects micro lenders to small businesses as well. An SBA micro loan will be managed by the bank or lender, and so the application requirements may differ depending on which one you decide to get. 

Micro Loan vs. Line of Credit 

One alternative to a micro loan is a business line of credit. While they have many similarities, especially in terms of their qualifying requirements, a business line of credit may offer more flexibility in terms of payback and interest rates. You can use a business line of credit to pay for things like inventory, vendor invoices, payroll, leases, and more. 

Here we compare the two options.

Micro loan Business line of credit
Up to $50,000 Up to $500,000
One time lump sum payment Revolving line of credit you can access again after you repay it
Interest rates from 6% to 30% Annual percentage rate (APR) of 8% to 24%
Short repayment terms and high (but predictable) monthly payment Only pay interest on what you spend but monthly payment will vary based on what you use
Can qualify with average credit score May be able to qualify with lower credit score
Six to nine months before funding Can access funding within two weeks

You might consider a business line of credit from these lenders:

Micro Loan vs. Business Credit Card

Business credit cards are another option for entrepreneurs or small business owners who don’t want to apply for a micro loan or traditional bank loan. While a credit card may appear similar to a business line of credit, they tend to be used for everyday business purchases, like gas, office supplies, or travel expenses. 

Micro loan Business credit card
Up to $50,000 Limit depends on the card and your qualifications but average is about $56,000
One time lump sum payment Revolving line of credit you can access again after you repay it
Interest rates from 6% to 30% Annual percentage rate (APR) of 0% to 24%
Short repayment terms and high (but predictable) monthly payment Only pay interest on what you spend but monthly payment will vary based on what you use
Can qualify with average credit score May be able to qualify with lower credit score or no credit history
Six to nine months before funding Can access funding immediately
May get business coaching or other training Rewards, points, cash back or other perks
May require collateral or personal guarantee No collateral or personal guarantee

Here are a few business credit cards you might consider:

Final Word: Nav’s Take on Micro Loans

If you’re a small business or entrepreneur with average credit who is looking for the best small business start up loans, a micro loan may be a good option. Nav can help you find out which loans you’re most likely to qualify for — in fact, our users are 3.5 times more likely to get approved for funding. Sign up for a free account to see your loan options or other business financing options. 

This article was originally written on June 30, 2022.

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