A microloan is a loan for small businesses.

What is a Microloan?

Microloans are short-term loans with relatively low interest rates extended to small businesses or self-employed individuals in need of funding. In America, microloans tend to offer between $500 and $50,000 in financing.

In developing countries around the world, microloans have been offered in smaller amounts to millions of borrowers to spur economic activity.

How do you get a Microloan?

Securing a microloan depends on multiple factors. One of the most important aspects is your credit score. Lenders use your credit score as a way to determine how likely you are to pay back a loan. The better your credit score, the more likely you are to be approved for a microloan.

Lenders will also take your behavior into account during the loan process. If you can present yourself professionally and show that you know exactly how you plan to spend the money from the loan, a lender is more likely to approve your application.

The application process may differ from lender to lender, but in general, you’ll need to provide identification, financial documentation, your business plan, collateral, and personal references. If you’re approved, you’ll receive the funds by check or as a direct deposit into your bank account.

How are Microloans paid back?

Microloans are paid back in a similar fashion to other loans. They’re often considered short-term loans to be paid back in a number of months, but there are also microloans that are paid off in installments over a longer period of time.

How are Microloans different from banks?

Microloans tend to have higher interest rates than comparable bank loans. On the other hand, microlenders are often a little bit more willing to take on risks and might give you a loan even if you have less than perfect credit if you’re able to present an impressive enough business plan. Some microlenders will even offer you a counselor to help develop business and marketing strategies. As their name suggests, microloans are smaller, so if your business needs a loan in the six figures, you’re going to need to look to a bank or a big shot investor.

What is the Small Business Administration?

The United States Small Business Administration is a federal agency that was founded in 1953 to protect the interests of small business owners. The SBA’s self-described mission is to “preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” The SBA gives funds to certified non-profit microlenders to provide loans to businesses to be spent on employees, supplies, furniture, machinery, equipment, and other expenses other than real estate or debt.

Are Microloans good?

That depends on which type of microloan you’re talking about and who you ask. Microloans are a relatively recent development in the United States, becoming more popular as an alternative option to bank loans after the financial crisis. In 2016, 4,472 microloans were provided through the Small Business Administration amounting to over $60 million. Nearly half of those loans went to businesses that are only two years old or younger.

Internationally, the results have been a little more mixed. According to researcher David Roodman, “The best estimate of the average impact of microcredit on the poverty of clients is zero.” Because most microloans are used to purchase basic necessities, they rarely lead to opportunities for new income. And even when a new business is started, there is often a lack of consumers with the proper funds to support the business.

Of course, you can also find success stories. You’ll have to do your research to form a proper opinion.

The bottom line

If you have a business and you need a relatively small loan, microloans can be a great option. However, be certain that the terms of the loan are something you’ll be able to afford and pay back—you don’t want to lose your collateral. When it comes to international microloans intended to lift people in developing countries out of poverty, the results have been debatable at best and negative at worst.