If you’re starting a new business and need money to launch or you’re trying to grow your small business and need funds to purchase new equipment or hire employees, you’ve probably considered getting a loan. However, if you don’t have an extensive credit history, you may not be able to access traditional loan options. If this is the case, a microloan may be a good alternative to provide you with an infusion of funds with reasonable interest rates.

Microloans: What Are They & How Do They Work?

When it comes to business lending, there are lots of options. Each type has qualification requirements, interest rates, payment terms, and stipulations.

A microloan is a short-term option ranging between $500 to $50,000. They are typically offered by non-profit organizations and make up a fraction of business loans in the United States. Only about 400 lenders currently offer them. The interest rates on microloans typically range from 12% to 18%. The primary intent of these loans is to help small businesses launch and grow.

In many cases, funding for microloans is provided by the United States SBA so that nonprofit organizations can act as an intermediary through the SBA microloan program.

Though the SBA is not actively involved in the approval/denial process for microloans, they do set the guidelines:

• Maximum of $50,000
• Maximum loan term of 6 years
• Can’t be used to pay off existing debt
• Can’t be used to purchase real estate
• Must apply for traditional funding before applying for a microloan

Microloans help purchase inventory, cover seasonal costs, and pay employees. They can also be used to build business credit.

Who Should Consider a Microloan?

Microloans are ideal for helping small businesses launch and grow. If you need a small amount of funding and lack the credit to qualify for traditional loan options, you may want to consider a microloan. The requirements are less restrictive, so they’re easier to qualify for.

In addition to helping small businesses launch, microloans can be used to combat inequities in the way capital is provided. While it’s difficult to obtain funds for a new business, the odds of being turned down are higher for people of color and women.

Therefore, microloan lenders typically offer these to female- or minority-owned businesses, especially those serving low-income or disadvantaged areas. This doesn’t mean that white males are automatically disqualified, but these lenders typically look at the overall scope of the borrower and business.

Do You Qualify?

Since microloans are considered “starter” loans to help a small business build credit before transitioning to traditional funding, they’re usually a lot easier to obtain. Still, there are a few things you can do to prepare for the application process and increase your chances of approval:

• Establish a business plan
• Get your financials in order
• Prepare collateral or guarantee

Disadvantages of Microloans

While there are several reasons that microloans are beneficial for small businesses, they also have some limitations. For example, most of the interest rates range from 12% to 18%. These rates are lower than traditional loans but are among the highest rates provided by the SBA.

If you need more than $50,000 or repayment terms longer than 6 years, a microloan may not be the best option for you.

Microloan Providers

Below, we have a list of microloan providers. You’ll want to check with each one to find out if any of their lending requirements have recently undergone adjustments.

• SBA
• USDA
• Grameen America
• Pursuit
• Nonprofits

Need Help with a Microloan?

If you believe a microloan is a good option for your business, contact Gipson Commercial Solutions today. We can help you determine if this is a good fit and help you with the application process.