Microlending: How startups can get and use microloans

What is microlending?

Microlending refers to the provision of small-scale loans, typically ranging from $5,000 to $50,000, as per the U.S. Small Business Administration, which is designed to support entrepreneurs and small businesses.

Unlike traditional loans, microloans cater to individuals with limited access to formal banking services, making them an ideal solution for funding entrepreneurial ventures, covering initial setup costs, or purchasing inventory.

These Small Business Administration (SBA) loans are particularly beneficial for fostering economic growth in underserved communities and are often accompanied by support services like business training or mentoring.

Who can benefit?

If you’re a business owner trying to get your business off the ground, SBA loans can provide the financial boost you need.

Here are the types of businesses that can benefit from a microloan:

• Startups: Launching a new business often requires small funding for equipment, supplies, or working capital. Microloans are specifically designed to meet these needs.
• Businesses with limited capital: If you’re running a small operation and lack resources to invest in growth, a microloan can help cover essential business expenses like inventory or machinery.
• Entrepreneurs with bad credit: Microloans are more accessible than traditional bank loans, making them ideal if you have a limited credit history.
• Small businesses without access to traditional loans: If financial institutions are not an option due to your business’s size, age, or annual revenue, microloans can offer the support you need.

Applying for the SBA microloan program means that, when approved, you can invest in projects that directly support your business’s expansion, like purchasing supplies, furniture, or equipment. However, note that these loan programs can’t be used to pay off existing debts or buy real estate.

How can I apply for a microloan?

The application process for a microloan involves working with nonprofit, community-based lenders or providers approved by the U.S. Small Business Administration. These lenders specialize in helping small businesses and early-stage startups access funding, consequently promoting entrepreneurship.

Here’s how microloans work:

1. Find an SBA-approved lender: Visit the SBA website to access their list of approved microloan lenders, also known as intermediary lenders. Look for one in your area or one that fits your business needs.
2. Gather required documents: Gather all the business documents needed to submit alongside your loan application. Here’s a list of everything you’ll typically need:
   • Personal identification
   • Business license and permits
   • Business plan (a document outlining your goals and strategy)
   • Personal and business tax returns (at least two years)
   • Pay stubs
   • Balance sheet and P&L statement
   • Cash flow projections (expected revenue and expenses)
   • List of collateral (assets you can pledge, like equipment or vehicles)
   • Any current leases or contracts
3. Submit your application: Contact your chosen lender to start the application process. Submit all the required documents and provide any additional information they request.
4. Underwriting process: The lender will review your application and assess your eligibility. This process may involve checking your business credit history, finances, and collateral. 
5. Loan agreement and funding: If approved, you’ll sign a loan agreement that outlines the repayment terms, interest rate, and loan amount. Funds are then disbursed to your business account.

Microloans compared to other loans

Here’s a detailed comparison of different business financing loans to help you assess their benefits and limitations.

Microlending vs. traditional business loans

Microloans are ideal for startups and underserved communities, while traditional small business loans cater to established businesses with significant funding needs.

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Microlending vs. personal loans

Microloans focus on the needs of small business owners, while personal loans cater to broader individual requirements.

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Wrap up

Choosing between microlending and other loan types depends on your financial needs, business stage, and creditworthiness. While microlending is a lifeline for startups and underserved communities, traditional loans, P2P lending, and personal loans serve broader or more specific financial needs.

That said, if you’re looking for alternative funding methods to fuel your business’s growth, consider Rho’s Corporate Cards¹. 

With them, you can make the purchases you need to keep your operations running smoothly, all while enjoying up to 1.25% cashback². Combined with our expense management platform, you can make more strategic spending decisions and gain the insights you need to take control of your budget.

Want to learn more? Schedule a demo today.