Microloan

What it means

A microloan is a small business loan intended mainly for start-ups and small entrepreneurs who would not get a bank loan, or only on worse terms. It is offered by state and public institutions, microfinance organisations and programmes funded from European sources.

Compared with an ordinary bank loan, it usually has lower interest, lighter requirements for collateral and trading history, and often a repayment holiday at the start. The amount is limited and the money is earmarked for a specific purpose such as equipment, stock or working capital.

Programmes often include advice and training. The lender wants the entrepreneur to survive the early years, so it assesses not just the numbers but the business plan and the applicant’s readiness.

How it works in practice

For the application we help prepare a business plan with a financial forecast, cash flow and assumptions that stand up to scrutiny. The plan should be realistic, because the lender later compares promises with results.

Once drawn, the principal is carried as a liability and the interest is deductible. If the microloan is cheaper than the market, the advantage may count as de minimis state aid, which must be recorded and counted towards the aid limit.

The money must be used for the purpose stated in the contract, and this must be evidenced by invoices. When use is checked, purchases are compared with the plan, and a mismatch can lead to early repayment.

What to watch out for

The most common mistake is treating a microloan as a way to cover losses rather than an investment in growth. If the business is not making money, the loan only postpones the problem and adds debt to repay.

The second risk is unverified lenders who merely pose as microloan providers and offer expensive credit with fees. Before signing, check who is lending and compare the total cost including fees.