A microloan is a small loan—typically under $50,000—from a bank, credit union, nonprofit lender, or online lender, meant for people or small businesses that can't get traditional bank loans.
Most microloans range from $500 to $50,000, though the exact range depends on the lender. They exist because traditional banks often won't lend small amounts to borrowers with limited credit history, no collateral, or irregular income. A microloan fills that gap. The tradeoff: interest rates are usually higher than a bank loan, and repayment terms are shorter—often one to five years.
Microloans come from different sources. The U.S. Small Business Administration (SBA) backs some through nonprofit lenders. Credit unions offer them to members. Online lenders advertise them heavily. Each has different rules about who can borrow, how much, and what the money can be used for.
Key Takeaways
- Microloans are small loans under $50,000, usually from nonprofits, credit unions, or online lenders rather than traditional banks.
- Interest rates on microloans are typically higher than bank loans because the lender takes on more risk with borrowers who have limited credit history.
- SBA-backed microloans through nonprofit lenders often come with free business training and mentoring, which online lenders do not offer.
- The money can usually only be used for specific purposes—starting a business, buying equipment, or paying for inventory—not personal expenses like rent or medical bills.
- Repayment terms are usually short, ranging from one to five years, so monthly payments are higher than they would be on a longer-term loan.
Where microloans come from and who offers them
The SBA Microloan Program is the largest source of small microloans in the U.S. It doesn't lend directly; instead, it funds nonprofit lenders in every state who then lend to borrowers. These nonprofit lenders are called intermediaries. You find them through the SBA's website, which lists them by state. Loans through SBA intermediaries max out at $50,000, and the nonprofit often requires you to take free business training before or during the loan.
Credit unions offer microloans to their members, usually with lower interest rates than online lenders. You have to be a member first, which typically requires living or working in a certain area or belonging to a specific group. Credit union microloans are often easier to get if you have poor credit, because credit unions look at your full financial picture rather than just a credit score.
Online lenders advertise microloans heavily and approve quickly—sometimes in hours. But they charge higher interest rates and fees, and they don't offer training or mentoring. Online lenders are fastest if you need money urgently, but most expensive over time.
What you can and cannot use a microloan for
SBA microloans must be used for business purposes: buying equipment, paying for inventory, renovating a workspace, or funding working capital. You cannot use an SBA microloan for personal expenses, paying off personal debt, or buying a house. Some nonprofit lenders are stricter than others about what counts as a business expense, so ask before you explore.
Credit union microloans sometimes have more flexibility. Some allow personal use; others restrict them to business. Online microloans vary widely—some are personal loans that happen to be small, while others are business-only. Read the terms carefully, because using the money for the wrong purpose can trigger early repayment or other penalties.
Interest rates, fees, and how much you'll pay back
SBA microloan interest rates typically range from 8% to 13%, depending on the nonprofit lender and your creditworthiness. Credit union rates are often lower, sometimes 6% to 10%. Online lenders charge the most: 15% to 36% or higher, especially if your credit score is low.
Beyond interest, watch for origination fees (charged upfront when you take the loan), prepayment penalties (charged if you pay off early), and late fees. SBA loans cap origination fees at 3%, but online lenders may charge more. A $10,000 loan at 12% interest over three years costs about $3,600 in interest alone; at 25% it costs about $8,000.
Use an online loan calculator to see what your monthly payment would be at different interest rates and terms. The difference between a 10% and 20% loan is substantial over time.
How to get an SBA microloan through a nonprofit lender
Start by finding the SBA intermediary lender in your state. The SBA website has a searchable directory. Call or visit the lender's website to ask if they're currently accepting applications—some close to new borrowers when they run out of funding.
You'll need to provide a business plan (even if it's straightforward), personal financial statements, a resume, and proof of your identity. Some lenders require a personal may provide, meaning you're personally responsible if the business can't repay. The lender will also check your credit and may ask for collateral—equipment, inventory, or a personal asset.
The approval process usually takes two to four weeks. Once approved, you attend the required business training (often online or in-person workshops), and then the lender disburses the money. Training topics typically cover cash flow, marketing, and record-keeping.
Microloans versus other ways to borrow
A traditional bank loan is cheaper if you can get one—lower interest rates and longer repayment terms mean lower monthly payments. But banks require good credit, collateral, and a solid business history. If you don't have those, a microloan is often your only option.
A line of credit from a credit card or business credit card is faster and more flexible—you borrow only what you need and pay interest only on what you use. But credit card interest rates are usually higher than microloan rates, and the credit limit is often too small for major expenses.
A personal loan from an online lender is similar to an online microloan but may have different terms and uses. The main difference is that a microloan is specifically designed for small business, while a personal loan is for any purpose.
Grants and crowdfunding don't require repayment, but they're harder to get. Grants are competitive and often have strict may be able to access rules. Crowdfunding requires a compelling story and marketing effort.
Common reasons microloans are rejected
Lenders reject applications for several reasons. Poor credit history is common, though nonprofit lenders are more forgiving than banks. Lack of a detailed business plan signals you haven't thought through your idea. Inability to show how you'll repay the loan—through business revenue or personal income—is a dealbreaker.
Some lenders reject borrowers who have unpaid tax debt or outstanding judgments against them. Others require you to have been in business for a minimum time (often six months to a year) before they'll lend. A few require collateral you don't have.
If you're rejected, ask the lender why. Some will work with you to strengthen your process or refer you to a different lender with looser requirements.
Frequently Asked Questions
Can I get a microloan if I have bad credit?
Yes. Nonprofit SBA lenders and credit unions consider factors beyond your credit score—your income, business plan, and ability to repay matter too. Online lenders are harder to get approved with if your score is very low, but some specialize in bad-credit borrowers at higher interest rates.
How long does it take to get a microloan?
Online lenders are fastest, sometimes approving in hours and funding in one to three days. SBA nonprofit lenders typically take two to four weeks because they require a business plan and training. Credit unions fall in between, usually one to two weeks.
What happens if I can't repay the microloan?
If you miss payments, the lender reports it to credit bureaus, damaging your credit score. They may charge late fees and try to collect the debt. If you signed a personal may provide, they can pursue your personal assets. Contact the lender when ready if you're struggling—some offer deferment or restructuring options.
Can I use a microloan to pay off other debts?
SBA microloans cannot be used to pay off personal or business debt. Credit union and online microloans vary—some allow debt consolidation, others don't. Check the lender's terms before you explore.
Do I need collateral to get a microloan?
Not always. SBA nonprofit lenders often don't require collateral if your business plan is solid and you can show you'll repay. Credit unions may ask for collateral depending on the loan size and your credit. Online lenders vary widely—some require none, others do.