Microloans for Small Business: Learn What's Available and Whether to Apply

When you own a small business, you’ll have a variety of obstacles to deal with and needs to meet. The one near-constant, however, is financing.

Like it or not, you need money to make money, and one of the biggest reasons why small businesses fail is their inability to deal with cash flow issues. Even successful businesses that have plenty of revenue sometimes hit a fatal cash crunch at the wrong time.

To combat this ongoing issue, business owners sometimes turn to business loans and other financing products, which can make sense if you have a plan in place to pay back your funding plus interest. One overlooked financing product, however, is the microloan.

Most business owners are familiar with the term microloan, even if they’ve never considered one themselves. The concept of microlending has transformed entrepreneurship in countries and markets where the barrier to entry is sometimes as little as a few hundred dollars—though that hardly seems like a useful sum to most U.S.-based businesses.

That being said, microloans can be an affordable, powerful tool for any business owner, provided they’re used effectively. Let’s review the top microlending options and how you can use them to finance a business.

What are microloans?

Microloans are typically considered any loan of $50,000 or less, often structured as a traditional term loan: A lender extends you the funds, which you pay back in regular installments plus interest.

For non-business owners, the idea that a loan is “micro” when it’s as high as $50,000 might be confusing. That’s a lot of money! But when it comes to business loans vs. personal loans, business loans tend to be much higher in dollar amount than the average personal loan. That’s because between purchasing real estate, renovating a commercial space, buying bulk amounts of inventory, and covering payroll (among other things), the costs of doing business are high.

The main difference between a microloan and a regular business loan, besides the dollar amount, is who qualifies for each.

A business loan from a bank or an online lender is almost exclusively for well-established businesses—successful companies that have operated for at least two years.

Microloans, meanwhile, are typically reserved for newer businesses—startups or those just getting on their feet—as well as companies run by oft-overlooked populations such as women, veterans, and minorities. Exact qualifications depend on the lender, but for the most part any business can apply for a microloan.

What kinds of microloans are available to SMBs?

It’s not as though every lender that offers business loans also has a smaller, microloan product. You’ll need to apply for a microloan specifically through a microlender.

The most well-known microlenders and organizations out there today include:

SBA Microloan program

The Small Business Administration offers a variety of loan products to all kinds of small businesses, including microloans to new business owners.

For the SBA Microloan program, the SBA distributes funds to small businesses through intermediary nonprofit lenders. Each lender has different lending and credit requirements. The one universal requirement across every SBA loan is a maximum repayment period of six years.

SBA Microloans range from $500 to $50,000, though the average loan amount is about $13,000. You can use these funds for working capital, buying inventory, or to invest in equipment or furniture and fixtures. The only restrictions are on using them to pay off existing loan debt or to buy real estate.

PayPal Working Capital

PayPal has become a major player in the world of payments and online lending. The PayPal Working Capital loan program distributes anywhere from $1,000 to $200,000 in, you guessed it, working capital.

The one catch is you need to be a PayPal seller in order to access the funds through your account. This downside is also an upside, however, because PayPal assesses your loan application based on data that is already available to them; no credit check is necessary.

Accion USA

Accion is an outstanding global nonprofit with a microlending arm, Accion USA, that has extended millions of dollars in funding to new and established businesses. Accion USA has loan programs that cater specifically to underserved communities, as well as businesses in specific industries such as the restaurant industry, and spas and salons.

Kiva

Kiva is another international nonprofit that combines peer-to-peer lending with microlending. Users can loan as little as $25 to worthy entrepreneurs around the world. Through this model, over $1 billion in loans have been funded through Kiva.

Business owners can borrow up to $10,000 at 0% interest thanks to Kiva, though part of the process is recruiting people from your inner circle to commit to lending a certain amount as well, improving your odds of repaying your funds.

Does a microloan make sense for my business?

There are very few situations where a business couldn’t use a microloan in some capacity to shore up their company's cash flow, cover costs, or help in case of an emergency.

That doesn’t mean every business should seek to take on debt when they don’t need it. But there are various initiatives that don’t require investments of more than $50,000 that can still have a real impact on your business, including:

• Renovations to your existing brick-and-mortar location
• Upgrades to your business’s website, e-commerce platforms, and/or digital marketing campaigns
• Purchasing bulk inventory to get the best possible deal ahead of the holidays
• Making emergency repairs following an unexpected disaster
• Purchasing new fixed assets and machinery

Essentially, any new project that requires more funding than you currently (or may ever) have on hand could be a worthy use of a microloan, provided the investment pays for itself within the repayment time frame you agree to.

There may be specific restrictions on how you can use a microloan according to which lender you use, so make sure to read the fine print before moving ahead with taking on debt from any bank, nonprofit, or alternative lender.

A little extra help via a microloan

Microloans are tiny relative to some of the multi-million dollar bank loans some businesses qualify for, but they can have a major impact on the success of a new, young, or growing business. If you need a little extra help getting your business or a specific initiative off the ground, a microloan may be just what you need.