A microloan is a loan that’s much smaller than traditional bank loans. They can be up to $50,000, though they’re usually less than $35,000, and the average microloan is only $13,000. This is a lot smaller than traditional loans, which on average are over $350,000. Since they’re so small, lenders are at less of a risk with a microloan, and getting approved for can be fairly easy. This makes them a good option for if your credit isn’t great, or if you need a loan quickly and don’t have time to wait for the usual processing time of a larger loan.
Since microloans are for smaller amounts and have shorter payment terms, lenders will normally set interest rates pretty high to make sure they can make a profit. However, since the amount is so small and the payment term is so short, even a high percentage might not amount to paying that much in interest. It’s also possible to get a microloan backed by the government or a non-profit organization, like an SBA Microloan. This insurance lowers risk for the lender, which can lead to lower interest rates. Some of these loan programs are focused on stimulating social and economic change, and might not have any interest charges at all.
Every lender has a different standard for its minimum credit requirement. Some microloans are designed for those with poorer credit scores, though most lenders have some minimum requirement. Many microloans are designed to support new businesses who don’t have any business credit history. These will rely on your personal credit history and your business plan to make their risk assessment, rather than your business credit. Microloans backed by the government or a non-profit organization tend to take a more holistic view of your business. While looking at your credit history, they may consider the context of your credit more charitably than others, considering the reasons you may have missed payments, or focusing more on your business plan than your business history. Non-profit lenders are also usually more lenient with borrowers from disadvantaged backgrounds.
While microloans tend to be more flexible than traditional loans, most lenders won’t want to approve your loan if you have truly bad credit. Bad credit can come from a history of missed payments, or simply a lack of credit history. If you have bad credit, you should ask to see your credit history from a major credit checker (all three of them offer this service for free). Sometimes credit reports can simply be mistaken, in which case you’ll have to check for yourself and have any mistakes corrected. Otherwise, the best way to improve your credit is simply by paying off any debts. Even one late bill can be a major blemish on your credit report, so keeping up with your bills should be enough to get your credit strong again. Another option to consider is even smaller “credit builder” microloans. These are designed to help new businesses build a credit history so they can later get eventually have access to larger loans.
Lenders consider a loan secure if the borrower offers collateral: something of value that the lender can take as compensation if you’re unable to pay off your loan. This extra security lowers risk for the lender, which will amount to better terms for your loan, like lower interest rates and easier approval. Sometimes a lender will require collateral before approving your loan request. This is common for business loans generally, where the loan will be secured by whatever you’re using it for (equipment, real estate, etc.).
If you’re taking out a microloan for your new business, lenders will want to see a strong, detailed business plan. Your business plan should show a good understanding of the market you’re in, and how your business will stand out in the field. This will help your lender feel that your business is a safe investment, which can mean better terms, and will help in getting approved in the first place. This Blank Template is a good starting point. If you’re looking for a government or non-profit microloan, your lender will use your business plan to consider things like how your business benefits the local community by creating jobs, and more.