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A Short Guide to Micro Loans

What’s smaller than small? Micro. Micro loans are the perfect way to inject a bit of cash into your business. Low principals make them easier to qualify for and short repayment terms mean you won’t spend decades paying them down.

Here’s how micro loans work, how to decide whether you need one, and what you need to do in order to qualify.

Why apply for a micro loan?

There’s plenty of great reasons to consider a micro loan. Here’s a few:

  • Higher approval rates. Four out of five businesses that apply for a loan get denied. If your business is brand new or your credit record is less than optimal, larger loans may be out of your grasp. The qualification requirements for micro loans are less stringent.

  • Short repayment terms. Plan your cash flow realistically, and you can quickly pay off a micro loan after you take it on—at most, payment terms for micro loans extend to six years. Fast repayment means one less expense on the books, ASAP.

  • Just the right size. Ranging in size from $500 to $50,000, you can pick the perfect micro loan to suit your needs—no taking on extra principal or borrowing beyond your means.

The difference between a loan and a micro loan

If your business is new and you haven’t got a long history of financial records to provide, or if your credit record is spotty, micro loans are a smart choice. In particular, they’re helpful if you need to borrow less than $50,000.

Why? When the lender underwrites you for a loan, they incur administrative fees. Those fees are about the same whether they’re lending you $50,000 or $300,000. The only difference is that when they lend you $50,000, the lender doesn’t make as much money in interest payments than if they had loaned you $300,000. So they often deny applications for smaller loans.

So, if you’d like $51,000, but could get by on $49,000, apply for a micro loan. That couple thousand dollars less will make all the difference.

Micro loans for women, minorities, and low-income borrowers

Some lenders—in particular the Small Business Association (SBA)—prioritize the borrowing needs of female, minority, and low-income borrowers in an effort to diversify the types of entrepreneurs receiving funding. If you fit into those categories, you may stand an improved chance of qualifying for a micro loan.

How to qualify for a micro loan fast

When you apply for a micro loan, the lender wants to be (reasonably) sure you’ll be able to repay it in a timely fashion, with interest.

Making sure you provide all the information you need can get you a micro loan faster. Submitting scant information, or leaving out something important, could mean you have to resubmit your application. It could also lead to the lender rejecting you.

To look good in a lender’s eyes, follow these four steps before applying for a micro loan.

1. Put a business plan together

A good business plan tells lenders where your business is going. It shows you plan on sticking around and making your business grow, giving your lender greater reassurance you’ll be able to pay off your loan

Your business plan should include:

  • Your goals, mission statement, and value proposition

  • How your business makes money

  • What vendors or suppliers you rely on to make your business tick

  • How you reach customers (in other words, your marketing plan)

  • Who you’re competing with for market share

  • Opportunities and plans for expansion

  • Financial projections

Creating a business plan doesn’t just help you get a loan—it’s good for your business, too. Having a business plan offers you a concrete picture of how your business functions, and what its future may hold.

2. Freshen up your credit rating

Since the principals for micro loans are relatively low, lenders are less concerned with pristine financial records than they are when reviewing applications for larger loans. Still, improving your credit score will improve your chances of qualifying for a loan.

If you anticipate taking out a loan in the future, start focusing on improving your credit now. Make your monthly credit card payments on time and, if possible, pay them in full. It also means working to pay down the principal on any money you owe to keep your credit utilization at a minimum.

3. Assess collateral

If you have a newly-minted business or a worse-for-wear credit record, lenders may ask you to provide collateral or a personal guarantee.

Collateral takes the form of something valuable, like personal or business real estate. In the event you default on your loan, the lender can seize a part of whatever asset you provide as collateral.

Once they approve your collateral, the lender will make a UCC filing, giving them a legal claim on a portion of your property.

If you don’t have a piece of property equal to the loan amount, the lender may ask for a personal guarantee. In the event you default, a personal guarantee allows the lender to seize present or future assets until the loan is repaid. That includes personal savings and investments.

Note: If you default on a loan, lenders are only allowed to take back an amount equal to the principal. So you’re only ever on the line for the amount of money you’ve borrowed.

4. Figure out how much you have to invest

Lenders want to see initiative on your part. If you haven’t invested any of your own assets in your business, but you come to them looking for a loan, they’re likely to turn you down.

In your business plan, show how much money you’ve already invested in your business. Additionally, in your financial projections, show how much you plan to invest in years to come. This will prove you’re serious about your business, and not solely relying on a lender to keep you afloat.

How to apply for a micro loan

If you’re applying for a micro loan from the SBA, contact an approved intermediary in your area first. The SBA provides a list, so you can find one near you.

As a member of your community, an intermediary is more sensitive to the challenges you or your business may face. They can offer you advice on your application—this helps you understand what size and type of loan to seek out, and how you’ll benefit from it.

If you’re applying for a non-SBA loan, there’s no need to go through an intermediary. Still, it’s wise to have a chat with a representative of the lending organization before you prepare your application. They may be able to offer advice on which loan to apply for, or even how to make your application more appealing.

Some micro lenders follow a similar process to the SBA—they require you to prepare an application and submit it. Others, such as Accion, offer an online application process, with personalized guidance from staff. Before pouring time and energy into a loan application, first figure out where you’ll be seeking a loan—applying may be easier than you think.

A micro loan is a great way to get short-term financing for your business—anything less than $50,000. Lower principals and shorter payment terms make them less of a financial burden than other small business loans. And lenders often accept applications from brand new businesses with less-than-perfect credit records.

However, a micro loan is just one of many ways to get your business more working capital. For other options, consider seven non-traditional ways to finance your business.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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