What is a Microloan?

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Microloans are normally defined as any loan for $50,000 or less. Since many banks are unwilling to provide smaller loan amounts, microloans are a great way for business owners to get access to capital. Some microloan programs are open to all types of small business owners, whereas others focus on providing financing to specific types of entrepreneurs, such as those in low-income communities or countries and female entrepreneurs.

How Does a Microloan Work?

Microloans are intended to help entrepreneurs who may have trouble getting financing from other sources, such as banks or credit unions. Most microloans are in the form of a traditional term loan or peer-to-peer loan. With traditional term microloans, the borrower is given the full loan amount by the lender and makes repayments on the principal amount and any interest accrued. With peer-to-peer microloans, each loan is funded by multiple individual or institutional investors through a lending platform, and borrowers will usually need to provide a compelling personal or business story to secure the interest of investors.

Many microloans loans are provided by nonprofit organizations or government agencies. This means that there may be restrictions on the use of the loan. For instance, microloans provided by the U.S. Small Business Administration (SBA) can be used for working capital, inventory purchases or other similar purposes, but they cannot be used to refinance existing debt or purchase real estate. However, nonprofit and governmental microloan programs frequently offer competitive interest rates and terms and fewer fees. Some microloan programs, such as Kiva, are even interest-free.

Microloan Terms and Features

While the actual terms of a microloan will vary across organizations, most microloans are offered in amounts up to $50,000, have interest rates from 5% to 20% and have monthly repayment schedules.

FeaturesAverage Terms
AmountUp to $50,000
Interest Rates0% - 20%+
Loan Terms3 months - 7 years
Repayment OptionsMonthly

One of the major benefits of microloans is that they offer access to capital that some business owners may not be able to get otherwise. Since it costs banks the same amount of money to underwrite a $50,000 loan as a $1 million loan, banks are less likely to lend to business owners who need a smaller amount. Some online lenders offer loan amounts as low as $1,000, but they usually have higher interest rates and fees than banks.

In addition, most online lenders and banks do not lend to new businesses or startups, making it difficult for would-be entrepreneurs to get funds. Microloans provide a bridge between online lenders and banks as they offer lower loan amounts than banks and more competitive rates and terms than many online lenders. Many microloan programs also cater to new businesses.

How to Get a Microloan

Qualifying for a microloan depends on the organization providing the loan. Programs like the SBA microloan program will want to see a borrower with a good or excellent credit score who can put up collateral for a loan. Other organizations, such as Kiva, do not rely on a borrower’s credit score and instead look for an interesting personal and business story. Some organizations will only lend to specific types of business owners, such as women, veterans, low-income individuals, minorities or farmers.

Microloan Programs and Organizations

Below we’ve listed some of the most popular microloan programs available to small business owners in the United States.

SBA Microloan Program

The SBA provides funds to nonprofit, community-based lenders to make microloans to small business owners. These lenders can provide microloans up to $50,000 to help borrowers start up or expand their small businesses. Interest rates on SBA microloans generally range from 8% to 13% and the maximum repayment term is six years. Eligibility requirements differ from lender to lender.

USDA FSA Microloans

The Farm Service Agency, part of the U.S. Department of Agriculture (USDA), offers microloans up to $50,000 for small or beginner farmers, niche or non-traditional farm operations, CSAs (Community Supported Agriculture), restaurants and grocery stores or those using hydroponic, aquaponic, organic and vertical growing methods. The FSA offers two types of microloans: farm ownership microloans and farm operating microloans. Farm operating microloans have an interest rate of 2.25% with a maximum term of seven years (though the average term is 12 months). Farm ownership microloans have an interest rate of 3.375% and a maximum term of 25 years.

Kiva

Kiva offers peer-to-peer microloans up to $10,000 with 0% interest. Terms vary from three to 36 months, with an average funding time of six weeks. To qualify for a Kiva loan, the borrower must be over 18 years old, a small business owner in the U.S. and have a verified PayPal account, and the borrower cannot currently be in bankruptcy. There is no minimum credit score needed to apply for a Kiva microloan. Potential borrowers will also need to provide a personal story and description of their business when applying.

Accion

Accion has a variety of microfinance programs offering loans from $300 to $50,000. Loan terms range from six to 60 months, with interest rates starting at 8.99% to 10.99% depending on the loan program. Accion also provides special microloan programs for startup businesses, daycares, food and beverage businesses and business located in Upper Manhattan, New York.

Grameen America

Focused on low-income women entrepreneurs, Grameen America offers $1,500 microloans with interest rates starting at 15% and no additional fees. Applicants must form a Grameen Group with four other aspiring female entrepreneurs. Once accepted, participants complete a week of financial training on loans, savings and credit building. Participants also open a savings account through Grameen America and meet weekly for continuing education. The program is available in 11 cities across the United States, including New York, San Francisco, Boston, Los Angeles, Austin and San Juan, Puerto Rico.

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