What Is a Micro Business Loan?

A microloan, also called a microfinance loan, is a financial instrument designed to help small business owners finance new businesses or expand their existing companies.

Size

Technically, a "microfinance" loan is anything under 20% of the per capita GDP of the country in which it's lent. In the U.S., where average income is around $50,000, a microfinance loan is up to $10,000. In practice, the Small Business Administration funds microloans up to $35,000.

Time Frame

Microloans can take from two weeks to several months to acquire and must be paid back over one to six years. The average duration is 42 months.

Considerations

Microloans have lower collateral requirements than traditional business loans; in some cases, the business owner may simply have to provide a guarantee.

Warning

Because the lack of collateral presents a higher risk to the lender, the interest rates are often much higher than in traditional business loans.

Expert Insight

Microloans should be used to make new investments, not used for operational cash. Otherwise, high interest rates can result in trapping a business owner into a debt cycle similar to payday loans.

References

• Entrepreneur: Microloans
• Small Business Administration: For Borrowers
• Kiva: About Microfinance

Resources

• United Nations Capital Development Fund