Can You Use Microloans to Finance Your Business?

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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.

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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.

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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.

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