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What is a Microloan?

Ken Black
Ken Black

A microloan is a program through which an agency or a lending institution makes loans available for those who are seen as having a strong likelihood of creating self-employment opportunities. The purpose is to help small businesses that are new or growing businesses expand in a proper way. The loans are paid back through profits made with the business venture.

While the most well known example of the microloan program is likely the one that exists in the United States, the program did not originate in America. Rather, it originated in Bangladesh as a way to combat poverty. In fact, the economist that devised the program, Muhammad Yunus, won the Nobel Peace Prize in 2006. Given this history, some may refer to a microloan as a poor loan. Microloans were made to those who were not considered bankable, but was very successful in accomplishing its goals.

Man holding a globe
Man holding a globe

In the United States, if an entrepreneur wishes to apply for a microloan, there has to be a sufficient guarantee that it will be paid back. This guarantee can be provided through a number of different ways, including existing cash flow, collateral, or a reasonable amount of personal credit. However, despite these requirements, a microloan may be easier to obtain than many other conventional loan types.

The microloan may be the difference between a small business succeeding or failing, but the investment from the federal government is rather small, given what may be at stake. All the loans are between $1,000 US Dollars (USD) and $35,000 USD. The repayment schedule is between three and five years. The payment is often referred to as a micropayment.

Once a microloan is awarded, the money can be used for a variety of purposes, according to the U.S. Small Business Administration. It can be used to make a retail location more appealing, such as a storefront facade improvement, or it can be used for more practical purposes. The microloan can help build inventory, buy equipment, or just provide some working capital for the business to get started.

To further help small businesses seeking a microloan, anyone looking to microfinance may be required to go through a workshop or class. This is designed to help these owners better understand the loan and small business practices in general. While some may shy away from this type of loan because of this requirement, other entrepreneurs may embrace the additional educational requirements.

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