Micro Loans

Many small business owners find themselves borrowing large sums of money during startup or times of growth. But what if your business doesn’t need all that much funding? A microloan, typically defined as a small business loan for less than $50,000, could be a solution for you.

The idea of micro loans came out of international development work. In 2006, a Bengali economist, Muhammad Yunus, won the Nobel prize for popularizing the idea of microfinance, or microlending, to support agriculture and other small businesses in developing countries.

The idea was to loan extremely small sums, sometimes as little as $25, to support the purchase of a cow or seeds to allow those otherwise living poverty to support themselves.

Smaller loans like this wouldn’t have been administratively feasible before the internet and mobile technologies were viable. Today, sites like Kiva.org provide ongoing lending to local entrepreneurs around the globe.

What is a micro loan?

In the United States, most micro loans are funded by nonprofits or community development organizations. Since the groups are non-profits, their goals are different than a bank. The organizations want to support economic development by helping people get working capital to start businesses in a community.

Small businesses like barber shops and bakeries are examples of businesses that help make a community vibrant and that a community development organization might want to support.

There are also some crowdfunding sites that can also be considered micro lenders for small business.

How does a micro loan work?

A micro loan works in much the same way a traditional loan works, just with slightly different terms.

The loans are always less than $50,000, but on average, are for between $10,000-$35,000, and the repayment term is usually around six or seven years. The interest rate will vary, but tends to run between 8-13%. According to the Congressional Research Service, in 2018, the average micro loan was for about $14,000 and had an interest rate of 7.6%.

Often, micro loans also come with business development support including business advice and support with legal matters in addition to business financing. Micro lenders also have special guidelines that encourage them to support non-traditional business owners, including women, minorities, and military veterans who may not have had a standard career path in business before deciding to start a small business.

Lastly, another important piece of micro lending is that it can be a good way for a business owners trying to establish or build up a credit score. When commercial lenders see your positive history with paying back a loan, they’re more likely to consider you a good risk if you need to borrow again later.

How do I get a micro loan?

To get a micro business loan, you’ll need to start by identifying an organization in your community that supports funding. Often, finding a Small Business Association (SBA) is a good place to start. Once you’ve found a group that supports micro loans, you’ll need to contact them to find out how they work--and how they can work with you.

You’ll also need to share information about what you need the money for. It might be to cover inventory costs, purchase equipment, or to just keep your business cash flow positive during a slow season or during a downturn.

How find the best micro loan for my business

The first step in finding a micro loan is a little different than a traditional loan, since you won’t be going straight to a bank. You’ll need to find a group that offers micro loans, whether it’s community-based or online.

Look at a few different options to determine which terms will work best for your business and what you feel most comfortable with using. You should consider what kind of support you’ll be offered along with a loan, as well.

Once you’ve determined a good fit, you’ll want to search for the best interest rate and loan term you can afford and then apply for your loan.

How to apply for a micro loan

To apply for a micro loan, you’ll need to fill out an application and share your personal and business financial information with a lender. That might include:

  • A credit score
  • Pay stubs
  • Information about other loans or debts
  • A business plan
  • Monthly and annual income for your business
  • Information about any collateral you can offer against the loan

Then, you’ll complete your application and make an important investment in starting a business or keeping one running with your working capital.