Best Business Microloans
If your business needs a micro-infusion of capital and you don’t qualify for bank financing, you may find success with microlending.
Microlenders at a glance
What is a microloan?
A microloan is a small loan, usually under $50,000, taken out by a business. They’re typically targeted toward startups, low-income borrowers or those with little or damaged credit. It’s also a popular option for entrepreneurs from underrepresented communities, as well as anyone unable to qualify for conventional business loans.
Common microloan providers include nonprofit organizations and government lenders. Some lenders may have restrictions on eligibility and limitations on how funds are spent.
That said, microloans often have flexible terms, lower interest ratess and fewer fees than traditional business loans.
How microlending works
A microloan provides a lump sum for business purposes — similar to a term loan. The specific rates and terms vary, but an SBA microloan has a maximum repayment term of six years. The USDA microloan, in comparison, has a 25-year term.
While microloans are available to any business that meets the lender’s eligibility requirements, certain entrepreneurs may be better suited for microlending as their primary form of business financing. For example, microlending tends to be a top choice for new businesses looking to secure startup financing.
Microloan programs may also offer additional services not traditionally offered at a bank or credit union, such as entrepreneurship mentoring or business classes. In fact, your lender may even require you to attend training sessions as part of your loan agreement.
Pros and cons of microloans
Microloans could offer many benefits to borrowers, but they might not always be the best choice for your financing needs. Consider these points before seeking a small business microloan.
PROS
- Lenient eligibility requirements
- Often prioritize minority and women-owned businesses
- Access to small loan amounts, which can be used for a wide variety of purposes
- Extra business resources, such as financial coaching and classes
CONS
- Short repayment terms and potentially higher interest rates
- Collateral and/or a personal guarantee is usually required
- Can’t be used for existing debt or real estate
- Lack of availability in some areas or eligibility based on specific demographics
- Might not be enough funds to help your business grow
How to get a microloan
If you’ve decided that a microloan is the right move for your business, here are the general steps to get a microloan for your small business:
1. Review eligibility criteria
Each microlender sets its own business loan requirements to determine borrower eligibility. Plus, some microlenders only work with businesses in specific geographic areas, industries or demographics.
Although microlenders tend not to rely exclusively on your credit score when reviewing your application, it’s still worth boosting your personal credit score before applying. Having a higher score could help unlock more favorable rates and terms — potentially saving you more money in the long run.
You can monitor your score for free with LendingTree Spring. Try to pay down your debts and dispute any errors on your credit report before submitting a loan application. If the lender does consider your credit score, it’s usually in the overall context of the loan application. However, serious financial issues — such as active bankruptcy proceedings — may disqualify your business from receiving a microloan.
2. Gather essential financial documents
Organizing your financial records can help speed along the application process. If you miss anything on the loan application or forget to include pertinent information, your loan application may get denied.
Here are some common documents your lender may need to see or access when applying for a micro business loan:
- Personal and business credit reports
- Business revenue
- Other sources of income
- Business plan
- The duration of time you’ve been in business
- Copies of your articles of incorporation, bylaws, or operating agreement
- Personal and business tax returns
3. Be prepared to provide collateral or a personal guarantee
A microlender may require borrowers to offer business assets as collateral to secure a microloan. Common assets can include cash, equipment or real estate. In addition, a personal guarantee may be required, meaning you’d be responsible for repaying the microloan if your business defaults.
4. Compare options and rates
Review each lender’s terms and conditions to pick the best option for your business. You may benefit from reading small business lender reviews in advance to ensure they align with your business’s criteria and needs.
You can also use our business loan calculator to see your borrowing potential, compare rates and get an overview of what you’ll pay in interest.
And before signing the dotted line, make sure to thoroughly read your business loan agreement. If anything seems confusing, it’s best to bring it to the lender’s attention before moving forward.
Alternatives to microlending
After weighing the pros and cons and the eligibility requirements of microfinancing, you might decide to explore different types of small business loans.
- Business line of credit: You can access revolving funds to help pay for a variety of business purchases with a line of credit, typically only paying interest on the withdrawn amounts.
- Working capital loan: A working capital loan for payroll, inventory, rent and other day-to-day expenses.
- Equipment financing: This loan can help your business purchase or upgrade equipment, including computers, vehicles and restaurant appliances. Since the equipment typically acts as collateral to secure the debt, many lenders don’t require a lengthy business history or down payments.
- Term loan: You receive a lump sum of cash and make scheduled payments with accruing interest. Funds can be used for a variety of business needs.
- Commercial real estate loan: If you’re considering purchasing real estate to expand your business, a commercial real estate loan can help.
- SBA 7(a) loan: Backed by the U.S. Small Business Administration, the SBA 7(a) loan offers up to with affordable rates and terms up to 25 years. Funds can be used for general business expenses, like hiring staff, payroll, inventory and marketing.
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Frequently asked questions
Microlenders typically like supporting new businesses that have great business ideas but can’t qualify for a traditional bank loan. Startups or business owners with little to no credit history are often eligible for microloans. Additionally, some lenders cater specifically to underrepresented entrepreneurs, such as women, minorities and veteran business owners.
Peer-to-peer lending (P2P) is a specific type of microloan available for small businesses. With a P2P microloan, you’ll receive funds issued by an individual or multiple funders instead of a bank. Typically, P2P financing is managed by a platform.
P2P investors select the companies and projects they’d like to fund. Therefore, you may generate more popularity among lenders if you have a solid business plan or an inspiring mission. Some peer-to-peer funding options include Kiva and Prosper.
If your business takes off and you want to give back to the community, you could consider investing in microloans. Overall, this can be a great way to diversify your income while helping budding entrepreneurs materialize their dreams. If you have limited funds, Prosper allows you to invest with just $25.
In general, microlending investing can produce decent rates of return. According to Prosper, the average historical return for microlending investing is 5.5%.
However, microlending carries certain risks, such as losing your initial funds if the borrower defaults on their loan. In addition, microlending platforms may charge investors extra fees, such as an annual loan servicing fee.
Our methodology: How we chose the best microloans
We reviewed more than 20 lenders to determine the overall best eight microloans. To make our list, lenders must meet the following criteria:
- Minimum time in business: Options for startups or those who have been in operation for 12 months or less.
- Minimum credit score: We prioritize lenders willing to look beyond credit scores, such as taking a big-picture approach to determining a company’s creditworthiness. The options on this list accept credit scores of 620 or less.
- Rates and terms: We focus on microlenders offering competitive fixed rates, no hidden fees and flexible repayment options.
- Loan amounts: A range of funding amounts for all types of businesses, with maximums from $2,500 to $500,000.
- Additional resources: Since microloans are mostly geared toward startups and low-income borrowers, we look for lenders offering business coaching, networking opportunities and free educational classes to help set new entrepreneurs up for success.