Microloans

What is a Microloan?

A Microloan is similar to the term loan (one of the most common types of loan options), except that it is for a smaller amount. Microloans are typically categorized as being less than $50,000 or so, with an average of about $13,000. Microloans range between $500 and $50,000 and are offered primarily by Microlenders, though online lenders can often fulfill both roles.

With the Microloan, the repayment term is often monthly (as opposed to weekly or biweekly). The repayment terms are often between 3 months to 5 years. Interest rates can range from 4% – 18%. You also have to have a very specific purpose in mind with regard to the funds. The Microloan is not as flexible as the term loan in this regard.

Put simply, the Microloan is designed to help new entrepreneurs, especially in underserved communities. It also serves as the perfect alternative to loan sharks, who offer small sums of money to vulnerable people at extortionate interest rates. Such people have no method to make a payment, and this is the intention of the shark in the first place.

However, the global average for a Microloan is set at 37%, which kind of defeats the purpose. This is the case for Microloans that are not designed with underprivileged communities in mind. These Microloans will have set low-interest rates to help this demographic get started.

Pros

  • Low Eligibility Requirements
  • Low-Interest Rates (in some cases)
  • Quicker Application Process

Cons

  • Often reserved for specific communities
  • Low amount of capital on offer

What Sort of Business Might Use a Microloan?

The Microloan is ideal for those who need a little cash to keep them going through difficult times. A prime example of this would be the Corona Virus that is currently running rampant throughout the globe.

Many small businesses are simply unable to keep going as they have no customers. In this instance, a microloan of $20,000 could often be the difference between the business that can survive and one that won’t. In this context, every business could benefit from a Microloan, because you never know just when you will need the cash.

But in practice, most small businesses would be better off with a line of credit or a more substantial term loan. A term loan can range all the way up to $500,000, while the line of credit extends all the way up to $250,000 (in certain instances). This is a far better cushion in case of a crisis, and far superior in terms of expanding the business.

The microloan is perfect for a business that has just started out. Without a decent credit score and at least $50,000 in annual income, it is hard to get a loan even with online lenders. The Microloan can be used to grow the business until a more substantial loan can be taken out down the line.

However, microloans are usually offered to specific demographics by lending institutions with very generous terms. An example of this would be the African Americas in underprivileged areas looking to start a business that will benefit the local community. These loans can go a long way for certain demographics. In sum, the microloan is perfect for:

  • Businesses that are just starting out who cannot get access to traditional funding.
  • Businesses run by minority owners.
  • Businesses that only need a small number of funds for a specific purpose.

Getting a Microloan

Microloans are easier to get than you might think. Because the loan amounts are quite low, the requirements are a lot less strict than other financing options. Many of them are specifically designed to help minority groups get started, the ones that have fewer entrepreneurial options available to them.

Because Microloans are for smaller amounts, the eligibility requirements are a lot lower (though it still depends on the specific lender you use). Microlenders tend to be a little less ‘analytical’ in their assessment. They want to know you as a person and your background. In many cases, the loan is generated with a social goal in mind, and the lender wants to lend to those that really need it, instead of just trying to get some extra cash from an investment.

Keep in mind that there are three broad types of Microloans. The first kind is the Microloan program designed specifically for disempowered groups. The second kind is the Microloan offered by online lenders, which often has higher interest rates. And then there is the payday ‘shark’ loan.

These are the programs designed to trap people who are not aware of how finance operates. Interest rates are sky high and desperate people take these loans to get themselves out of a fix. But they are really just shooting themselves in the foot.

A Simple Application Process

The loan application process for the Microloan is similar to the traditional loan, except with less documentation. Follow the outline on your lender of preference to see the steps involved in the Microloan. 

You will file online and supply all of the usual documentation, which can include personal income statements and any financial statements from your business to disclose debts and cash flow.

5 Best Microloan Lenders

Many online lenders that generate other loan types facilitate Microloans. The best online lenders can include:

SmartBizSmartBiz facilitates SBA loans, some of which are microloans in the region of $30,000 – $50,000. They can deliver these loans very rapidly in comparison to other providers, and have a lower rate than usual.

kabbageKabbage only offers the Line of Credit from $5,000 to $100,000, not the standard Microloan. You will need $50,000 in annual revenue to qualify, but the qualification process is quick and painless.

lending clubLending Club offers crowdfunded business loans from $5,000 to $500,000. However, the eligibility criteria can be quite stiff, with $100,000 in annual revenue and a credit score above 600 required for many loans.

LoanBuilder LoanBuilder offers loans ranging from $5,000 to $500,000. Minimum eligibility criteria are 9 months in business and $42,000 in annual revenue. Only short terms loans (12 months max) are offered through this lender.

ondeckOnDeck offers both the term loan (up to $500,000) and the line of credit (up to $250,000). Applicants will need a 600 credit score and 3 years in business, as well as $250,000 in annual revenue. This makes them unsuitable for many new businesses.

SBA Microloans

The US Small Business Administration (‘SBA’) also offers its own Microloan program. These Microloans are not offered by the SBA directly but by Microloan intermediaries. These intermediaries can only give loans to applicants under certain conditions. The condition includes the following (as indicated by the SBA):

  1. The maximum loan term for a microloan is six years.
  2. Intermediaries may not charge more than 7.75% over their cost of funds on microloans of more than $10,000.
  3. Intermediaries may not charge more than 8.50% over their cost of funds on microloans of $10,000 or less.
  4. The SBA does not review, underwrite, or have the authority to approve or deny a microloan. Each intermediary will determine the loan terms to the microborrower.
  5. Microloans are made to women, low-income, veteran, and minority entrepreneurs and others with the capacity to own and operate a small business.

Conclusion

Getting a Microloan might be just what your business needs to get up and running. If you are just starting out and need the capital then it is the perfect option. 

Alternatively, if you are a member of a particular demographic (veteran, female, Indian, African American) then a niche Microloan program might be available to you. 

You might also want to consider Microloan grant programs. If you have a unique business story there are plenty of these options available. 

Microloans FAQs

How long does it take to get a Microloan?

You can apply for a microloan within 10 minutes, and get near-instant approval. Funds can be in your account within 24 hours. However, the process can take longer if additional documentation is required. It also depends on what lender you decide to use and what the criteria are with that lender.

What documents do I need for a Microloan?

You may not need any documents to apply for a microloan. With Kabbage, the process is automated. You simply hook up your online accounts to their automated system and they complete all of the processing on their end. But other lenders might ask you to supply bank statements and personal documents verifying proof of address, tax identification number, etc.

Can I get a Microloan with bad credit?

Yes. Many microloan lenders will allow you to apply without any kind of credit score. However, your interest rates will be higher to offset the increased risk.

Does a Microloan require collateral?

No microloans will rarely (if ever) require collateral. The amount is too small to justify the usual collateral (such as a house) which can dwarf the value of the loan itself.

Can anyone get a Microloan?

Many microloans have strict conditions on who can qualify. With others, there are very few requirements. It depends on what lender you use. Microloans are usually offered to veteran groups including African Americans, women, and Hispanics.

How much can I borrow on a Microloan?

Technically, a Microloan ranges between $500 – $50,000. The average amount is $13,000. The more you borrow, the more scrutiny and red tape you will have to go through. Some online lenders have minimums of $5,000.

How long does it take for a Microloan to go through?

The same as it takes for a standard loan to get through. After application, you will often get a response within 10 minutes. If you are accepted, the funds may be in your account within 24 hours. It usually does not take more than 2 days for the microloan to appear in your business account.

How does a Microloan affect your credit?

Whenever you take out any kind of loan, your credit rating might go up. This is because of the nature of the credit scoring system. It can get complex, but once you pay off your credit on time and use credit regularly, then it will increase.

Can you get a Microloan with no equity?

You cannot get a business Microloan without having any equity in the business. What you would get is a personal loan, where you do not have any business and thus no equity in anything.

Will a Microloan help my credit?

A Microloan can help your credit rating, just like any other loan. However, you will have to understand your credit utilization ratio and to pay all of your debts on time. If you fail to pay payments, it will really hurt your credit score.

What is considered collateral for a Microloan?

No collateral is required for a Microloan in the majority of instances. Collateral can often include company assets. But due to the nature of Microloans, it could be personal assets as well, to ensure that the business owner pays the loan back on time and does not default.