Micro Loans

Add a header to begin generating the table of contents

Page written by Chris Godfrey. Last reviewed on June 5, 2025. Next review due April 6, 2026.

Small, fast, flexible, and easy to access, micro loans can be a gamechanger for entrepreneurs or small businesses who are struggling to obtain traditional business finance.

Add a header to begin generating the table of contents

What is a micro loan?

A micro loan is a small, short-term business loan designed to help entrepreneurs or small businesses that typically lack access to regular banking services or do not qualify for conventional loans. Provided by government sources, some banks, non-profits, online lenders and charities, and with eligibility and repayment terms that are more flexible that mainstream business lending, these loans are often used to start or expand small businesses or support underserved communities.

How do micro loans work?

Micro loans can be used to start, maintain or grow a business.

Key Features:

Small loan amounts: Micro loans are generally for modest sums, suitable for micro-businesses or individuals needing limited capital. The precise amount considered ‘micro’ can vary, but it is typically much lower than standard business loans
Target borrowers: Micro loans are aimed at small enterprises, startups, or individuals who are underserved by mainstream banks, often due to poor or no credit history or lack of collateral
Application process: Micro loan providers typically assess the borrower’s personal or business situation in detail, rather than relying solely on credit scores or collateral. This allows more flexible, tailored lending decisions
Interest rates and terms: Interest rates on micro loans are generally lower than payday loans but may be higher than traditional bank loans, reflecting the higher risk and administrative costs. Repayment terms are usually short to medium term, depending on the lender and loan size
Support and training: Many UK microfinance providers, especially not-for-profits, also offer business training and support alongside lending. This helps improve the chances of business success
Loan repayment: Repayment is usually structured in regular instalments and may be tailored to the borrower’s ability to pay

What can I use a micro loan for?

Micro loans are commonly used to purchase equipment, inventory, or cover working capital for small businesses. However, they can also be used to launch a new business, covering initial costs such as renting business premises, creating a business website or covering the cost of an operating licence.

Who can benefit from a micro loan?

Young companies, established businesses, entrepreneurs just starting out – micro loans can help many types of organisation.

Startups and early-stage businesses

Micro loans can provide essential funding for UK start-ups and early-stage businesses that may lack access to traditional finance. These loans can help to cover initial costs like equipment, inventory, or marketing, enabling businesses to launch or grow. With lower borrowing amounts and flexible terms, micro loans can reduce financial strain, support job creation, and foster entrepreneurship, especially in underserved communities. They can also help build credit history, improving future access to larger funding sources.

Small businesses needing short-term funding

Micro loans can provide small businesses with quick access to short-term funding for managing cash flow, covering unexpected expenses, or seizing timely opportunities. With lower borrowing limits, fast approval, and flexible repayment terms, these loans can deliver a practical solution without creating unmanageable long-term debt. Ideal for bridging gaps between invoices or seasonal fluctuations, micro loans can help businesses stay operational and competitive while avoiding disruption due to financial shortfalls.

Entrepreneurs with limited access to traditional finance

Building a business or driving a project when you don’t have access to traditional finance can be tough. Micro loans help UK entrepreneurs resolve this problem by offering small, manageable funding without requiring extensive credit history or collateral.

What are the pros and cons of micro loans?

Like all financial products, micro loans have their advantages and disadvantages.

Pros

Lower sum, lower risk: Because micro loans are smaller (often under £50,000), the financial risk is reduced for both lenders and borrowers
Flexibility: Microfinance organisations often provide more flexible repayment terms and are more understanding of irregular cash flows, which is especially helpful for new businesses
Fast access to capital: Microloans can be processed and disbursed more quickly than traditional loans, helping businesses take advantage of immediate opportunities
Added support: Many micro loan providers also offer business advice, mentoring, and support, increasing the likelihood of business success

Cons

Higher cost than traditional business loans: While lower than payday loans, micro loan interest rates are often higher than mainstream business finance, reflecting the increased risk and administrative costs
Smaller loan amount: The small size of micro loans may not be sufficient for some businesses that have larger capital requirements

How to apply for a micro loan

Applying for a micro loan is similar to applying for any business loan. The first step is to identify a suitable lender—this could be a government source, a community development finance institution (CDFI), a bank or an online microfinance provider. Be aware that lenders will often have very specific funding rules, so you’ll need to research their eligibility criteria carefully to make sure your business type, location, and funding needs are covered.

Once you’ve found a suitable lender, prepare key documents such as a simple business plan, cash flow forecasts, and personal identification such a proof of address. You may also need to demonstrate how the loan will support your business goals.

Complete the application online or in person, providing detailed yet concise information about your business, financial position, and how you plan to use the loan. Some lenders may require a brief interview or additional documentation. If your application is approved, micro loans are usually issued quickly. Funds could be deposited into your bank account within 24 hours of approval.

How to fast track your micro loan application

Every micro loan lender will have a unique loan criteria and methodology, which means applying one by one could be a slow and frustrating process. Alternatively, you could fast track your application by using the services of a financial marketplace that gives you access to a wide range of micro loan lenders with just one application. Not only does this tactic save you time, it can give you loan comparisons that let you choose the best deal for your situation.

What are the alternatives to micro loans?

If a micro loan is not for you, there may be other ways to get the funds your business or project needs.

Business grants

Business grants are provided by local and national government and some foundations and charities. This is effectively free money, as grants do not need to be repaid like a loan. However, applicants should be aware that there is often stiff competition for grants, the application process can be slow and difficult, and the pool of available money is usually limited, which can restrict the amount of cash you may receive.

Crowdfunding

Available via various online platforms, crowdfunding can provide the cash you need if your presentation hits the right spot. Although it may be tough to raise large sums in small donations from hundreds of donors, the cash is essentially free as there is no interest to pay, and you don’t need to repay the money if you spend it where you said you would. An eye-catching idea and a powerful pitch are essential to succeed with this funding option.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a method of borrowing money directly from individual investors through an online platform, bypassing traditional lenders such as banks. Businesses apply for loans, and lenders may choose to fund them, often in small amounts across multiple loans. Although this lending method can be time-consuming for borrowers, it may offer access to funds when businesses are unable to obtain other types of business loan.

Get started with Swoop's business funding platform

Working with business finance experts can make all the difference when applying for a loan. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality micro loans from a choice of lenders. Grow your small business into a big business. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

Swoop promise

At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.

Find out more about Swoop’s editorial principles by reading our editorial policy.