Background

Microloans developed to expand credit access for entrepreneurs who lack collateral or a long credit history—think community lenders, nonprofit microlenders and the SBA Microloan program (max $50,000) [SBA.gov]. Term loans are the conventional business loan: banks, credit unions and online lenders offer fixed or variable-rate loans sized for equipment purchases, commercial real estate, or larger working-capital needs.

How they work (at a glance)

  • Microloans: Small amounts (often $500–$50,000), shorter terms (commonly up to 5 years), and lighter documentation. Many microloan programs bundle training or technical assistance with credit. See SBA microloan guidance for program details (SBA.gov).
  • Term loans: Broader size range (from roughly $10,000 up to seven- or eight-figure amounts), structured amortization, and stricter underwriting—credit score, time in business, cash flow and collateral matter more.

Key differences that matter to small businesses

  • Purpose: Use microloans for inventory, small equipment, or short-term operating gaps. Use term loans for larger purchases (machinery, leasehold improvements, major expansion) or long-term refinancing.
  • Cost: Microloans can carry higher nominal rates or fees because they’re smaller and riskier for lenders. Traditional bank term loans often have lower interest rates but stricter terms. Always compare APR and fees, not just headline rates.
  • Qualification: Microloan programs are designed for borrowers with limited credit histories or collateral. Term loans expect established revenue history and stronger credit profiles.
  • Speed and support: Microlenders may fund faster and offer borrower training; banks take longer but can provide larger, lower‑cost capital.

Real-world examples

  • Microloan: A neighborhood bakery borrowed $15,000 from a local microlender to buy an oven and bridge seasonal slowdowns. The smaller loan and lender support made the transaction feasible despite a short credit history.
  • Term loan: A retail chain used a $250,000 term loan with a five-year amortization to renovate three locations—costs were spread over time, and projected increased sales covered payments.

Who typically qualifies

  • Microloan candidates: Startups, sole proprietors, microbusinesses, social enterprises, and businesses in underserved communities. Program eligibility and underwriting vary by lender. (See SBA microloan program overview.)
  • Term loan candidates: Businesses with 2+ years of steady revenue, documented cash flow, and acceptable credit. Collateral and personal guarantees are common.

Practical decision checklist

1) Define the use of funds: If it’s small and immediate, consider a microloan. If it’s a multi-year investment, lean toward a term loan.
2) Run the numbers: Compare APR, origination fees, prepayment penalties, and total cost over the loan life.
3) Review cash flow: Use a simple debt-service coverage test—project monthly payment vs. predictable cash inflows.
4) Check non-lender benefits: Some microloan programs include training, networking or technical help that improves success odds.

Common mistakes to avoid

  • Choosing the cheapest monthly payment without checking total cost (fees and APR matter).
  • Using short-term microloans for long-lived equipment—mismatched maturities raise refinancing risk.
  • Skipping a cash-flow stress test: model 10–20% lower revenue to see if payments remain affordable.

Professional tips (from experience)

In my practice advising small businesses, I often recommend starting with a clear purpose and 12–24 month cash-flow forecast before approaching lenders. If you expect irregular income, a smaller microloan or a short-term bridge plus a plan to refinance into a term loan once cash flow stabilizes can work well.

When to combine products

It’s common to mix loan types: use a microloan for working-capital needs while arranging a term loan for equipment. Layering financing can preserve liquidity while matching asset lives to loan terms.

Related resources

Sources and further reading

  • U.S. Small Business Administration — Microloan Program (SBA.gov).
  • Consumer Financial Protection Bureau — small-business loan shopping guidance.

Disclaimer

This article is educational and not individualized financial advice. Loan rules, rates and program details change; consult a qualified lender or financial advisor for decisions specific to your business.