How to Get a Microloan for Your Business

We explore how a business microloan differs from a standard consumer loan.

Microloan or Bank Loan?

Small and growing businesses often need funds for urgent needs. Passing a bank’s credit check is not always feasible: banks require high turnover, good credit history, and extensive documentation. For quickly borrowing a small amount relative to your business, a microfinance institution (MFI) may be the solution.

Getting a loan from an MFI is fairly simple — only a small set of documents is required. It is also fast — funds are typically issued within a week. But speed comes at a cost. Interest rates for microloans can be higher than bank loans.

How to Obtain a Loan at a Lower Rate?

Surprisingly, entrepreneurs can indeed borrow at favorable terms. One way is to provide collateral. Both commercial and government MFIs reduce the interest rate when confident the funds will be repaid. Examples of acceptable collateral include:

• Goods or inventory
• Equipment
• Securities
• Vehicles
• Real estate
• Personal property

If you fail to repay, the collateral becomes the property of the MFI.

How to Take a Preferential Microloan?

1. Check eligibility: Verify whether your business meets the support program requirements.
2. Submit requests: Send inquiries to MFIs offering business microloans.
3. Select and apply: Choose the most suitable option and complete the microloan application form.
4. Wait for MFI decision: Within 12 days of receiving a complete document package, the MFI must respond. If approved, you will sign the loan agreement at the MFI office. The loan amount will be credited to your account immediately afterward.

If the application is rejected, the MFI must explain why. For example, you may already have an outstanding preferential microloan. In that case, you can only apply for a new one after repaying the existing loan.

Submit Documents and Sign the Agreement

If the application is approved, the MFI will provide the agreement either in person or electronically. Ensure the terms have not changed and that they suit you. Sign the agreement and return it to the MFI. Funds will then be transferred to your account or corporate card.

For larger or long-term loans, additional documentation may be required, such as financial statements. MFI staff may also request a visit to your office or production facility to verify that your business is legitimate. It is in your best interest to meet these requirements to ensure approval.

Confirm the Purpose of the Loan

Within 60 business days of receiving the funds, you must demonstrate that the money was used specifically for business development. Acceptable documentation includes:

• Payroll records for employees
• Contracts for supply or purchase of raw materials
• Bank statements showing fund usage

This ensures the preferential microloan is used for its intended business purposes.