What Are Microloans & How To Get One

For many small business owners, securing financing is the single greatest hurdle to launching or growing their brand. Traditional bank loans can be difficult to obtain, especially for new ventures, sole proprietors, or those in underserved communities.

In recent years, microloans have emerged as one of the most popular business financing options for small businesses, providing a critical financial bridge for business owners that don’t fit the rigid mold of conventional lending institutions. Learn more about microloans, how to start the application process, and how this type of loan differs from other loan options.

What are microloans?

Microloans are very small loans offered to entrepreneurs, startups, and small businesses that struggle to access traditional loans. The loans are small amounts of money, ranging from just a few hundred dollars to a few thousand dollars, with a maximum loan cap far below what a traditional bank would consider. The average microloan amount is $13,000 in the United States.

The concept of microloans is the central pillar of a movement known as microfinance, which was pioneered by Muhammed Yunus, founder of the Grameen Bank in Bangladesh. He began by lending tiny sums to small farmers and artisans, and proved that these small loans were repaid reliably and created sustainable economic change. This proven track record of repayment—even among borrowers traditional banks reject—is why US microlenders can offer you more flexible terms. Today, this model helps entrepreneurs who lack perfect credit or extensive collateral access the capital they need to start or grow their businesses.

How do microloans work? 

The microfinance lending model gives you a distinct advantage: local decision-makers who understand your market, not distant algorithms, evaluate your application. Instead of a purely transactional process, it’s often more personal and hands-on.

In the United States, one of the most well-known loan programs is SBA’s microloan program. The Small Business Administration provides funds to a select group of designated intermediary lender organizations, who then distribute the money to borrowers. These intermediary lenders are typically community development financial institutions (CDFIs), non-profit organizations, or other community-based organizations that are deeply embedded in the areas they serve.

After receiving business capital from the SBA, the intermediary lenders manage every aspect of the loan, such as the application, underwriting (reviewing the applicant), disbursement of funds, and collection of monthly payments. This model allows the lending decisions to be made at a local level by people who understand the community’s specific business needs.

Under the SBA microloan program, small businesses can typically borrow up to $50,000, although the average SBA microloan is much smaller. These funds can be used for a wide variety of purposes, including working capital, inventory, supplies, or purchasing machinery and equipment.

Many loan programs, especially the SBA’s microloan program, require providing technical assistance to borrowers. The microlender or intermediary lender often provides (or requires) borrowers to participate in training, counseling, or mentoring in exchange for the loan. This technical assistance helps small business owners strengthen their business plan, improve their financial management skills, or develop marketing strategies—ultimately increasing their chances of success and ability to repay the loan.

Microloans vs. traditional loans

The primary difference between microloans and other financial products like traditional bank loans lies in their purpose, flexibility, and terms. 

Purpose 

Traditional loans from a large financial institution are designed to minimize risk for the lender, while microloans are designed to maximize opportunity for borrowers. This is why microloans are seen as a key tool for promoting financial inclusion, especially for minority entrepreneurs, women, and small business owners in underserved communities who lack access to conventional credit. These loans are not generally offered by large national banks, but by a network of specialized lending institutions. These include non-profit organizations, mission-driven microfinance institutions (MFIs), and community based organizations whose primary goal is to foster local economic development rather than to maximize profit.

Flexibility

The most significant distinction between microloans and traditional loans is the underwriting process. Traditional bank loans are heavily reliant on quantitative data: Lenders perform a deep dive into an applicant’s personal and business credit history, looking for signs of good credit (like a high credit score), lengthy borrowing history, and substantial collateral (such as real estate or expensive equipment) to secure the loan. A new small business or an owner with bad credit is almost always rejected.

Microloan lenders, by contrast, take a more holistic view. While they don’t ignore credit, a community development financial institution will place much more weight on the quality of someone’s business plan, character, understanding of the market, and forecasted cash flow than financial history alone. Microlenders are also more willing to engage with eligible borrowers who have a poor or non-existent credit history. Although some collateral or a personal guarantee may be requested, the credit requirements are fundamentally more flexible.

Loan amounts and terms

This flexibility has limits. Traditional small business loans from a bank, or larger SBA loans, like the 7(a) or 504 programs, can provide millions of dollars. Microloans are, by definition, small. The SBA microloan program has a maximum loan of $50,000, but the average microloan is often just a few thousand dollars. This is perfect for a bakery needing a new mixer or a consultant needing a new computer, but it’s not enough to build a factory.

Loan repayment terms also differ. A traditional bank loan may have a term of 10 or 25 years. Microloans are shorter term loans. The maximum term for an SBA microloan is typically six years, and many lenders offer even shorter terms, especially for very small amounts. This can result in higher monthly payments, even if the total loan amount is small.

Advantages and disadvantages of microloans

Microlending’s unique operating model leads to pros and cons for entrepreneurs. 

Advantages of microloans

Microloans afford entrepreneurs with low income or poor credit access to capital, and often entail training in key business skills.

• Accessibility. Microloans are one of the few financing options available to low-income or minority entrepreneurs and those with bad credit.

• Focus on character. Microloan lenders often use individual lending models that assess you as a person, not just a credit score.

• Integrated support. Mandatory technical assistance is a massive benefit. Business counseling can be just as valuable as the capital itself in improving a borrower’s long-term viability.

• Speed for small amounts. For a loan of just a few thousand dollars, the process with a local CFDI can sometimes be faster than a traditional bank’s underwriting process.

Disadvantages of microloans

Microloans can entail punitively high interest rates, and they may need to be paid back more quickly than cash flow can support:

• Higher interest rates. To cover the risk of lending to borrowers with no collateral and to pay for the hands-on technical assistance, microloans almost always have higher interest rates than traditional bank loans.

• Small loan amounts. The maximum loan size is very limited. A successful, growing small business will quickly outgrow the need for microloans and need to seek other financing options.

• Shorter repayment terms. The shorter term loans can put a strain on monthly cash flow, as monthly payments may be higher than on a longer-term loan.

• Personal guarantee. Even without significant collateral, many lenders will still require a personal guarantee, meaning you are personally responsible for paying back the loan if your business fails.

How to get a microloan

1. Define your business needs and prepare your story
2. Find the right microloan lenders
3. Complete the application and due diligence
4. Take advantage of technical assistance

If you’ve decided that a microloan is the right fit for your business needs, the process is more personal and community-focused than applying at a large bank.

1. Define your business needs and prepare your story

Before you approach any lenders, get clear on your numbers. What do you need the money for? Instead of just saying “working capital,” be specific: “To purchase $3,000 in raw inventory to fulfill a new contract.”

Microlenders evaluate character and vision more than credit scores, which means your business plan becomes your strongest asset. It should include:

• A clear description of your business and its loan products or services

• An understanding of your target market and competitors

• Basic financial projections (expected sales, costs, and profits)

• A specific explanation of how the loan will be used and how it will help you generate more revenue to repay it

2. Find the right microloan lenders

You won’t find small loans at a large traditional bank. Your search should focus on local and mission-driven lenders:

• SBA’s intermediary lender network. This is the best place to start. The SBA provides a list of all its approved intermediary lenders by state. These community development financial institutions (CDFIs) and non-profit organizations are your primary targets.

• Prominent national non-profits. Other organizations operate on a larger, sometimes national, scale. Grameen America, for example, is the US branch of the Grameen Bank and focuses on lending to women in poverty.

• Community-based organizations. Search for local community based organizations, credit unions, or economic development centers in your city or country. Many offer microloans as part of their mission to support the local economy.

• Peer-to-peer platforms. Although distinct from the SBA program, some online platforms connect business owners directly with individual investors for small-scale financing, though these often operate with different loan terms and credit requirements.

3. Complete the application and due diligence

Applying for a microloan is an active process. You will likely fill out an application and submit your business plan and any financial statements you have, which includes a simple profit-and-loss statement. Be prepared for an interview. A loan officer from the CDFI will want to meet you, and this is your chance to shine. They are assessing your character, your passion, and your expertise. This is part of their due diligence. Be honest, be prepared, and clearly articulate your vision and your ability to repay the loan.

4. Take advantage of technical assistance

For many lenders, especially those in the SBA microloan program, technical assistance is not optional—it’s a core part of the loan requirements. You may be required to attend workshops on bookkeeping best practices or cash flow management before your funds are approved.

This shouldn’t be seen as a hurdle, but rather as a free education to protect your investment and ensure your business succeeds. The loan recipients who actively engage with this support have a much higher rate of success.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.