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How Does a Microloan Work?

If you don’t think you’ll qualify for small business funding, try applying for a microloan geared toward local businesses that may not otherwise be able to secure funding through traditional means. Microloans are small low-interest loans targeted towards startups and small businesses in need of extra capital.

Unlike many other types of providers, microbusiness lenders are usually non-profit companies and work in specific communities. The time it takes to get funded through a microloan can be longer than other funding options, but the interest rate is usually much lower. If you have the time to wait for a microloan, it’s a viable option for funding, especially when you don’t qualify for other funding options. Some microloans are offered through individuals on crowdfunding websites. This online form of financing is also called peer-to-peer lending.

Maximum Loan Amount

Up to $50,000

Loan Term

Up to 6 years

Interest Rates

8% to 13%

Time to Funds

As soon as 2 months

Peer to Peer Lending

Most online microloans are peer-to-peer because financial institutions tend to find microloans too risky, should they default. Individuals, however, may be more willing than banks to lend small amounts to a diverse group of businesses, spreading their investments so that the occasional default is not disastrous.

Microloan written on a piece of paper next to some money, a calculator, and a notebook.

The Internet Age has made peer-to-peer financing a popular and viable option through websites like Prosper and Lending Club. Borrowers can request money from peer-to-peer lenders by presenting a business plan and short description of the loan’s intended use.

Peer-to-peer lending rarely requires collateral. However, even the highest-rated borrower can expect higher-than-usual interest rates. Interest rates can be anywhere from 6% to 35.99% annually, depending on the borrower’s credit score. Single investors or groups of investors are often enticed to micro lend because they can charge higher interest rates depending on a borrower’s creditworthiness and the likelihood of defaulting on the loan.

How to Apply for a Peer-to-Peer Microloan

You have many options when looking for a microloan online. Peer-to-peer lending sites such as Fundingcircle, Upstart, and Prosper, exist to set borrowers up with investors interested in funding their business ventures. Borrowers with good credit, a low DTI ratio, and substantial income will find the most success in searching for a peer-to-peer loan. Those with a bad credit history may have a harder time finding (or even qualifying for) a loan. In that situation, sites such as LendingClub, designed for borrowers with less than perfect credit, might be your best chance.

To apply, simply fill out the online application form on the website of your choice. The lending platform will assign you a score or risk level, which will then be shared with investors on the site. You may choose to include a business plan and a brief explanation of how you will spend any funds received in your loan request. Lenders may bid for the opportunity to fund your loan, or you may be passed over. If you receive a loan offer and agree to it, you’ll start receiving funds from the lender. You can expect the entire process (including receipt of the funds) to take up to 14 days.

SBA Microloans Program

Woman filling out an SBA 7(a) loan application.

The Small Business Administration (SBA) also offers microloans through their Microloans Program. The program is extended to small businesses and certain non-profits who want to borrow small amounts up to $50,000. Microloans are not obtained through the SBA itself. Instead, they are offered through an intermediary lender, typically a non-profit organization specializing in financial assistance and education for businesses in their local communities.

Microloans at a Glance

Microloans can be used toward inventory or supplies, working capital, machinery or equipment, or furniture or fixtures. They can’t be used to purchase real estate or pay off existing debt.

The average size of a microloan is $13,000, but it can be up to $50,000. The interest rate for a microloan tends to range between 8% to 13% and is repaid in monthly installments.

It usually takes about one to two months to get your microloan funds after you apply. That’s a little longer than with other funding types of this size. One of the benefits, though, is that businesses unable to secure traditional small business funding may be approved for a microloan. This is because microloans are offered by non-profit organizations that focus on businesses that are credit challenged, low income, veteran-owned, minority-owned, or women-owned. Also, businesses that don’t have the financial history to qualify for traditional funding may be approved for a microloan.

Main Advantages

Besides low-interest rates, one of the most significant advantages of a microloan is that you get more than money. The non-profit company may also train you and offer technical assistance to help you grow your company. This is an advantage because microloan organizations can offer valuable business management assistance. They can help you learn how to start or expand your business. Depending on the microloan intermediary lender, this training may be a requirement for your loan.


To be approved for a microloan, you may be required to offer some kind of collateral. It’s always risky to secure a business loan with your personal property.

SBA Microloan Eligibility Requirements

Intermediary lenders have different requirements, but typically, to qualify for an SBA-funded microloan, borrowers must offer collateral as a personal guarantee of repayment. Repayment terms vary depending on factors such as the loan amount, the borrower’s business plan, and conditions set by the intermediary lender. The borrower’s needs will also be taken into account.

The maximum legal payment term for an SBA Microloan is six years. Interest rates vary based on the intermediary but are generally between 8% and 14%.

At the time of application, the borrower must not owe more than $50,000.

Some microloan financiers require borrowers to complete training or other requirements before being approved for a microloan. Training offered by intermediaries often focuses on helping borrowers depending on what stage their business is in.

How to Apply for an SBA Microloan

If you’re interested in an SBA microloan, you can start the application process or get more information through your SBA District Office. You can also apply directly to an SBA-approved intermediary lender. Note that the application process may vary between lenders.

Microloan Wrap Up

Microloans are offered by SBA-approved intermediaries. Every year these non-profit organizations lend to small businesses that may have had trouble getting a low-interest loan elsewhere. You can head over to for a complete list of intermediaries in your area. SBA-funded microloans are typically favorable for borrowers, with the added bonus of finance coaching services like training and classes to help you effectively manage your money.

Alternatively, you may choose to look online to peer-to-peer lending platforms, which can provide you with loans traditional lenders might not. Peer-to-peer lending might a less ideal option as it may not be as accessible to low-income borrowers. Rather, it functions similarly to traditional lenders with some alterations; those with the highest credit scores will likely receive the best rates. If it’s a choice between the two, then SBA loans might be the most affordable avenue for funding.

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