Financing a small business can be a first-time entrepreneur’s biggest challenge. If you’re like many others out there,  it’s difficult to keep investing your own money in the business due to personal bills and unrelated expenses. At the same time, it can also be difficult to qualify for a traditional bank loan without strong cash flow. 

If you’re struggling to obtain funding from traditional financing sources, a microloan might be the answer to getting the working capital that you need to get your business off the ground. Below, we’ll define a microloan if you’re new to the concept, explain how it’s different from other financing options available, and help you determine whether it’s the right loan option for you. 

What are microloans?

In short, microloans are small, short-term loans of up to $50,000 to help small business owners get their companies up and running. Microloans are different from traditional small business loans in three big ways: the reason behind the loan, the people involved in the loan, and the size of the loans. 

Microloans are geared toward entrepreneurs who might not have access to traditional funding options. The more mission-based microlenders often help support specific groups, like women and minorities, while other microlenders help freelancers or new startups with only a few employees.

This type of funding is also different because it’s issued by specific entities rather than banks or other financial institutions. Whereas big banks are often behind large loan amounts that carry a fixed monthly payment, microloans are typically smaller loan amounts offered by nonprofit organizations, the government, or existing businesses specializing in this type of lending. In fact, there are more than 10,000 microfinance institutions in the world today.

Microloans can benefit those in a range of fields, from brick-and-mortar retail shops, restaurants, firms offering various services, and manufacturing outfits to consultants, freelancers, and those in skilled trades. Small businesses can also use microloans for various activities, including covering payroll or purchasing new inventory and equipment.

Pros and Cons of Microloans

Microloans can be a good resource for some new businesses, but that doesn’t mean they’re right for everyone. To help you assess whether a microloan is the right choice for you, here’s a list of pros and cons to review:

Pros:

  • Access to funding, even if you don’t have established credit: Even if other lenders have turned you down, you could still be eligible for a microloan. 
  • Build credit for future loans: If you don’t have a high credit score or a substantial credit history, you’ll likely be turned down for funding from the big banks. As you pay a microloan back, you build a credit history, which can help improve your eligibility for traditional loans down the road. For example, if you want to start a small construction business, you’ll need quite a bit of money upfront to purchase equipment and hire workers, which a traditional bank loan can help you secure.
  • Repay the loan faster: Since you’re typically borrowing a smaller amount as a short-term loan, you’re likely to repay your microloan faster than if you’d taken a regular bank loan.
  • Enjoy flexible loan terms: Traditional bank loans come with all kinds of repayment terms guided by federal regulations. Nontraditional lenders aren’t necessarily held to these regulations, though, which means there’s an opportunity to negotiate more flexible terms.

Cons:

  • The loan amount is smaller: You’re limited in how much you can receive in a microloan — usually just a few thousand dollars, sometimes even less, depending on the lender. So, if you need substantial funding to get your business going, this isn’t the answer for you.
  • Typically, higher interest rates: Because microloans aren’t always supplied by a lender held to strict regulations like traditional loans, microlenders know there is more risk involved with the borrower and can charge a higher interest rate. This could add to the fixed costs of your small business, eating away at the already low margins of someone just starting. 
  • Varying eligibility requirements: Because there aren’t as many regulations around microloans, there are different terms, depending on the lender.
  • Microloans are unregulated: If you become unhappy with your lender’s terms over time, there isn’t as much oversight or protection with this type of loan.

Requirements for Microloans

The requirements for microloans can vary depending on the lender, so be sure to review their list of qualifications before applying for the loan. That being said, there are a few things a business owner should prepare before applying for a microloan, including:

  • Develop a business plan: Anybody launching a new business should create a business plan first. Many lenders will want to see this business plan before offering you funding. If you’ve never written a document like this before, ZenBusiness offers a free resource guide to walk you through the process of creating a business plan for your new endeavor.
  • Check your credit score: Although we’ve established that microloans are a good option for those with bad credit, lenders will still want to see your credit score. If you have no business credit history, they’ll ask to review your personal credit score. Ensure you check your credit report frequently so that there are no surprises when you apply for your loan.
  • Prepare for collateral or guarantees: Not all microloans require this, but some will ask the borrower to put down collateral or guarantees as a security measure for the lender. Collateral can be property — such as real estate, a car, or something else of value — or some other asset, like stocks or bonds. Lenders are looking for items they can quickly convert to cash if you default on your loan. Many lenders will also ask for a personal guarantee from the business owner, which is a legal promise to repay the loan.

Microloans for Small Businesses

There are a number of microloan lenders for small business owners. Here are a few microlenders that you might want to consider:

  • U.S. Small Business Administration (SBA): The SBA is a federal entity and offers various resources to business owners, including microloans. The funding is offered through intermediary lenders — including some geared toward the nonprofit community. Borrowers can receive up to $50,000, with an average loan size of about $13,000. Each intermediary lender has their own set of qualifications, but borrowers should expect to offer collateral and a personal guarantee. In 2019, more than 5,000 microloans were offered by the SBA’s microloan program. 
  • Kabbage: This small business lender offers borrowers quick and easy access to the cash infusion they need. Once you apply online, they’ll review your financial snapshot to give you a fast decision. They also offer flexible access to funding.
  • Kiva: This global lender and nonprofit is working to build a more financially inclusive world. They crowdfund loans to offer capital to small businesses in underserved communities.
  • Accion USA: A pioneer in the microfinance industry, Accion uses microloan funding to empower people in disadvantaged areas worldwide. In the U.S., they specifically work with women, low-income individuals, and entrepreneurs of color. The application process is simple — it takes less than 15 minutes to apply — and they offer fair and flexible repayment terms.  
  • Grameen America: This lender targets women living in poverty, with an emphasis on minority women. In addition to affordable business financing, they also offer financial education, networking, and opportunities to build credit and save.  
  • Opportunity Fund: This lender seeks clients who don’t qualify for bank loans and provides them with the financing they need. They offer a range of amounts, including funding more than $50,000, often considered the cap for a microloan. They also actively support borrowers who’ve “faced disadvantages like racism, sexism, homophobia, language barriers, trauma barriers, trauma from military service, or simply poverty.” Opportunity Fund wants to get to know the person behind the credit score.
  • DreamSpring: DreamSpring works with diverse business owners to give them the financial boost they need if traditional lenders don’t work with them. They offer loans as low as $20,000, with flexible terms and interest rates to fit any scenario. They don’t offer funding in every state, though, so check their map to see where you can work with them.
  • Pursuit Lending: This company targets business owners in New York, New Jersey, and Pennsylvania. They offer a streamlined application process, access to 15 loan programs, and fast loans with flexible terms.
  • Pacific Community Ventures: This nonprofit lender believes in social good and uses microloans to empower California-based entrepreneurs and their communities. They offer loans from $10,000 to $200,000.
  • Justine Petersen: This lender offers various microloans to small Missouri businesses with a focus on rural areas. The loans range in amounts, terms, and interest rates. All require collateral, though. 

Find Finance Resources for Your Small Business

If you’ve been turned away by traditional bank lenders or prefer alternative lending sources, it’s good to know that you have options. Microlending could be the best choice for your new business. A quick cash infusion from these smaller loans could be all you need to get your company off the ground. Even if you don’t have a credit history — or even if you have bad credit — many microloan lenders will still offer the financial support you need to pursue your passions.

As a new business owner, you’ll need all the resources you can get as you form, launch, manage, and build your company. ZenBusiness offers all the tools you need at any stage of growth. Let us help turn your dreams into reality as you start, run, and grow your business.

Building Scene

Ready to get started?

Start Your Business Today

Start Now