What Are Microloans and How Can I Get One?

By QuickBooks

4 min read

One of the great ironies of small business financing is that the less money you need to borrow, the harder it is to get. If you’re seeking less than $50,000 in capital, a microloan could be right for you.

Here is some much needed information to help you navigate the microloan landscape.

What Is a Microloan?

Microloans arose to meet the need for smaller amounts of funding to help business owners create jobs in their communities. Banks typically don’t like to make loans of under $50,000 because the costs to service the loans outweighs the profits. Although the definition may vary a bit depending on the organization making the microloan, in general, microloans share these characteristics:

  • Very small loans ($500-$50,000)
  • Short-term loans
  • Designed for businesses with little or no credit history, low-cost startup businesses, sole proprietors or businesses with very few employees

Microloans can be used for many purposes, including working capital, inventory, fixtures/furnishings and equipment or machinery for your business. Microloans are often used to help disadvantaged populations, such as minorities, women or companies providing employment in impoverished areas. Such entrepreneurs may find it difficult to get bank loans or other traditional sources of business financing.

Pros and Cons of Microloans

Microloans’ primary benefit is that they allow you to get smaller amounts of financing than most banks are willing to offer. On the downside, the interest rate for microloans may be higher than the rates offered by banks for larger loans.

One major benefit of microloans—especially if you are just starting a business and have no experience in management or entrepreneurship—is that microlenders often provide additional assistance along with the loan. In fact, many microlenders require you to take courses in topics such as business plan writing, accounting, marketing and other business basics before they’ll even consider your application. All this extra help can give your business a competitive edge.

In addition, microlenders are more open-minded than banks or other traditional financing sources. While banks often focus solely on the numbers, microlenders are more willing to consider the big picture and how your business and growth plans will benefit your community.

Where to Get Microloans


1. The Small Business Administration

The SBA Microloan Program started in 1992. As with all SBA-guaranteed loans, microloans are not made directly by the SBA. Instead, SBA-approved lenders, typically non-profit or community organizations, make the actual loans, which can be used for both startup and expansion capital. SBA microloans average $13,000.

2. Accion

This microlender has been around for over 50 years and has financed millions of borrowers in developing nations in addition to the United States. Accion offers microloans to a wide variety of industries, including child care, restaurants, salons and spas, as well as nonprofit organizations and “green” businesses. It focuses on specific demographic groups, such as people with disabilities, Native Americans, minority business owners, women business owners and business owners who are military veterans.

3. Grameen America

The Grameen Foundation helped originate the concept of microloans; founder Muhammad Yunus won a Nobel Prize for his concept of providing small loans in the developing world. Sister organization Grameen America has made more than $339 million in loans to help lift American women out of poverty. Women form groups of four who meet to receive training in business and finance, then receive loans of $1,500 each. The program operates in 11 cities.

4. Kiva Zip

A spinoff of Kiva, a global microlending organization that makes $25 loans to people in the developing world, Kiva Zip is a peer-to-peer lending platform that enables individuals to obtain microloans from other individuals. First, however, you’ve got to make a microloan yourself on the site, and then get your friends and family to lend you money to prove your creditworthiness. Once those hurdles are cleared, your business is posted on the Kiva Zip site, where more than 1 million lenders can see your profile.

There are also many microlenders focusing on specific states, regions or communities. Your local municipality, Chamber of Commerce, economic development organization, SCORE office, SBA district office or Small Business Development Center (SBDC) can also help you find microloan sources.

How to Get a Microloan

Even though obtaining a microloan is generally much easier than getting approved for a traditional bank loan, you’ll still need to do the following.

First, as with any other business, write a business plan. Lenders want to see what you plan to do with the money as well as your future plans for your business.

Second, improve your personal credit rating. If your personal credit rating isn’t top-notch, take steps to boost it before applying for a microloan.

  • Put skin in the game: Microlenders expect you to invest your own money in your business, even if it’s a nominal amount. Some also expect you to get financing from friends and family before applying for a loan.
  • Be prepared to put up collateral or offer a personal guarantee.
  • Take business training from the microlender (if required prior to the application process).

By taking steps to investigate your microloan options, writing a thorough business plan and completing all of the requirements before applying for a microloan, you’ll significantly boost your chances of getting the capital you need.

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