What is a Microloan, and Should You Consider It? | Fora Financial Blog
What is a Microloan, and Should Your Business Consider It?
September 13, 2019

What is a Microloan, and Should Your Business Consider It?

Regardless of if you’re a new business owner, or are a veteran looking to grow your operations, securing funding can be a major obstacle. In fact, even if you need a small amount of financing, many business owners struggle to procure the amount of money they need to stay operational.

Luckily, that’s where microloans come in. This type of financing is offered to business owners across the United States and enable them to get small loans to use for business costs. If you’re interested in this financing product, keep reading to determine if a microloan is right for your business.

Microloans: Explained

Microloans are small loans that can be utilized by startups or established small businesses. With less strict guidelines and flexible terms, these loans are a good option for businesses that don’t qualify for traditional loans. This includes small businesses that are just getting off the ground or don’t have excellent credit scores. Microloans are offered by the Small Business Administration (SBA) and other lending organizations.

Typical Microloan Terms and Amounts:

The most common microloan lender is the SBA. They offer microloans that are under $50,000, with an average amount being $13,000. The amount offer that you receive will be based on your financial situation, your business’s needs, and how you plan to spend the money.

As previously mentioned, this type of loan usually has flexible repayment plans. As noted in an article from Inc., microloan repayment terms usually span numerous years and can be paid off in installments.

While interest rates for this financing tends to be higher than traditional loans, often between 12 to 18 percent, the reasonable monthly payments are preferred by many small business owners.

How to Qualify for a Microloan:

Although traditional business loans are often difficult to be approved for, microloans tend to have less stringent prerequisites. Still, eligibility for this type of financing will vary from lender to lender. Be sure to review guidelines carefully before applying, as this will help you increase your chances of securing the loan.


How to Apply for a Microloan:

Like any other small business loan, you’ll apply for a microloan through a lender.

When applying for microloan programs, most online lenders will ask to see a detailed business plan, credit history, and plans for how the funds will be used. While credit score will most likely be taken into consideration, the requirements for credit scores and credit history tend to be more flexible with this product. Ultimately, being prepared will increase your chances of successfully acquiring funding.

How to Use a Microloan:

When you receive this financing, it’ll probably come with guidelines on what you can and cannot use the funds for. Some lenders will be stricter than others when it comes to these guidelines. An SBA microloan can be used for working capital, business supplies and office furniture, additional inventory, and equipment. Other lenders may ask that you outline specific projects that you’ll be using the financing for.

Many small business owners use this funding option to get their business off the ground. That often means investing in inventory and getting an office space. Even if the costs aren’t extremely expensive, they’re most likely out of reach for a startup, which is why a microloan can be beneficial.

Conclusion: Is This Financing Right for Your Business?

If your business needs a relatively small loan for startup costs or additional working capital, a microloan might be the answer. The key is finding a lender that has terms you can work with, and with a mission that fits your business plan. Do your research, know your options, and come prepared when looking for funding to grow your business.

Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2019.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Jess has a passion for helping business owners build their brand and connect with their audience. She writes about money, tech, health, and travel for blogs and businesses.