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What to Know: Microlending

What to Know: Microlending
September 28, 2023

In an increasingly interconnected world, access to financial resources is essential for individuals and communities to thrive. Unfortunately, many people, especially those in developing regions, lack access to traditional banking services. This financial exclusion has given rise to alternative lending models, one of the most impactful being microlending. Microlending offers small loans to individuals and small businesses who may otherwise struggle to secure credit through conventional means. In this comprehensive guide, we will delve into the world of microlending, exploring its history, potential, and usage for small business owners.

What is a Microloan?

A microloan is a small loan, usually up to $50,000, provided to small businesses and certain not-for-profit childcare centers to start up or expand their operations. The average microloan is about $13,000. Microloans are typically for those who do not have access to traditional banking services. These loans are meant to empower borrowers to start or expand small businesses, improve their living conditions, and break the cycle of poverty.

Historical Background

The concept of microlending traces its roots back to the 1970s, with the pioneering work of Dr. Muhammad Yunus, a Bangladeshi economist. Yunus founded the Grameen Bank in 1983, which focused on providing micro loans to impoverished people, primarily women, in Bangladesh. His vision and success earned him the Nobel Peace Prize in 2006, and today, the Grameen Bank model has inspired microlending initiatives worldwide.

How Microlending Works

The borrower usually uses microloans if they do not have access to local financial institutions, if they have poor credit, or if they want a loan for a specific purpose. The loan amount is usually less than $50,000 and can be provided by a single individual or procured from several investors who each contribute a percentage of the total amount. Typically, microloans feature lower capital requirements than conventional financing.

Microlending companies and programs are generally more flexible than traditional lenders, and they may offer more favorable terms and conditions. The loan terms and lending criteria are usually more flexible than those for typical business loans. To increase borrowers' odds of success, microlenders may also provide business training, mentoring, and other support services.

Am I Eligible?

Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner. To be eligible for a microloan, you must meet the following criteria:

  • Be a small business or a not-for-profit childcare center
  • Need financing for working capital, inventory, supplies, furniture, fixtures, machinery, or equipment
  • Have a business plan
  • Have good character, credit, and experience
  • Demonstrate the ability to repay the loan

How Do I Use a Microloan?

Microloans can be used for a variety of purposes that help small businesses expand. Use them when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Examples include:

  • Working capital
  • Inventory
  • Supplies
  • Furniture
  • Fixtures
  • Machinery

How Do I Apply for a Microloan?

To apply for a microloan, you need to follow these steps:

  1. Get business coaching: Whether you need business advice, resources, or support creating a plan, it is strongly encouraged to talk to a business coach before enrolling in the program.
  2. Apply for a microloan: Fill out a simple online application for the microloan. Complete all program requirements.
  3. Receive funding: Once approved, receive the funding and use it for your business.

What Are the Advantages of Microloans?

The main advantage of microloans is that they provide funding to businesses that typically don’t qualify for a standard small-business loan, including startups, business owners with bad credit, and those in underserved communities. Microloans also have low fees, competitive interest rates, and long repayment terms.

What Are the Disadvantages of Microloans?

The downside of microloans is that they are small-dollar business loans. If you need more than $50,000 to grow your business, you may need to look elsewhere. Alternatives to a microloan include other nonprofit microlenders, invoice financing, and traditional term loans from banks.

Microloans can be a great option for Canadian small business owners who need financial assistance to start up or expand their operations. However, it is important to carefully consider the eligibility requirements, the terms and conditions of the loan, and the alternatives available before applying for a microloan.

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