Business microloans: what entrepreneurs need to know

How to Use a Microloan to Grow Your Business

Microloans can provide opportunities to grow your small business. Here are some examples of ways you can use a microloan: 

• Product stock 
• Inventory and supplies
• Furniture
• Equipment and tools
• Machinery
• Employee wages  

Note: Keep in mind that microloans cannot be used to fund real estate or repay existing debt. 

For example, let’s say a baker named Phoebe is looking to expand her small doughnut shop to meet the growing demand for her unique flavors. However, due to her limited savings, she can’t afford to purchase the new equipment and ingredients needed to grow her business.

As a result, Phoebe decides to apply for a $10,000 microloan to purchase another oven, bulk ingredients, and outdoor furniture so guests can enjoy their doughnuts on the patio out back. 

After she makes these upgrades, she introduces even more new flavors and her business flourishes.

SBA Microloan Requirements 

SBA microloans have more flexible requirements than other business loans since they were created to provide opportunities for entrepreneurs who wouldn’t qualify for traditional financing. Some microloans are specifically geared toward members of underserved communities such as women, veterans and minorities. 

While SBA microloan lenders each have their own eligibility requirements, below are the general criteria you should meet to get approved for a business microloan: 

• Credit score: Certain lenders prefer that you have a fair FICO® credit score of 620 or higher, although many lenders don’t use credit scores to determine eligibility. 
• Personal guarantee: Most lenders will require a personal guarantee stating that you as the owner will repay the loan if the business cannot.
• Collateral: Many lenders will require you to put down collateral, which can include business or personal assets. 
• Business plan: Lenders typically want to see a comprehensive business plan that includes an executive summary, description of products or services, market analysis,  business structure, marketing strategy, and financial projections.  
• Operating location: Many lenders only lend to businesses in specific locations or states, so you’ll need to prove that your business operates in the approved location. 
• Financial statements: You’ll need to provide your business’s financial statements, including balance sheets and cash flow projections. 
• Startup status: The business must qualify as a startup according to the SBA, which varies by industry. Typically, your business must be under two years old. 

Benefits and Drawbacks of Business Microloans 

In this section, we’ll cover how microloans can help your business, as well as the potential issues that can arise that you should be aware of. 

Benefits of Microloans 

Business microloans offer several advantages to entrepreneurs, including: 

• Flexible requirements: Since microloans don’t have strict credit score requirements, they are easier to qualify for than other loan types. 
• Accessibility for underserved communities: SBA microloans aim to offer financial support to women, individuals with low income, veterans, and entrepreneurs from minority groups who may struggle to access capital through conventional banks.
• Low interest rates: Ranging 8%–13%, SBA microloan interest rates are competitive. 

Drawbacks of Microloans

While microloans have several benefits, there are some disadvantages to keep in mind: 

• Collateral requirement: Many lenders require you to put down collateral, which can deter business owners who don’t have business assets and prefer not to supply personal assets. 
• Personal guarantee requirement: By providing a personal guarantee, you’re putting your own financial goals at risk. 
• Smaller loan amounts: The maximum microloan amount is $50,000, which is lower than that of traditional loans. 

How to Apply for a Microloan

Here’s how to apply for a microloan for your small business: 

1. Research-certified microlenders: The SBA provides a list of microlenders authorized to participate in its program. You can filter the list by state or territory to easily access lenders operating in your area. 
2. Review lender requirements: Review each lender’s requirements to see if your business is eligible. 
3. Create a business plan and compile necessary documents: Create a business plan and gather any documents necessary for the application, such as financial statements, tax returns, and licenses. 
4. Fill out the application: Complete the application form provided by the lender.  
5. Wait for approval and receive funds: Wait for the lender to approve your application. Once approved, you will receive the funds within seven to 14 days. 

Similar to other loans, business microloans plus interest need to be repaid to the lender according to the terms of the loan. With business microloans, the repayment period is shorter than for other loans, with a maximum repayment term of six years. 

Learn More About Small Business Loan Options 

All in all, business microloans are an excellent option for entrepreneurs looking to grow their businesses due to their flexible requirements, accessibility, lower interest rates, and longer repayment terms. 

However, microloans may not be a great option for you if you require more funds or don’t meet the eligibility requirements. It’s important to consider your business goals and current financial situation to determine the best loan type. 
Explore more small business loans to find the right fit for your business.

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