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Rainbow Loom was created by Cheong Choon Ng, a Malaysian immigrant of Chinese descent who came to the United States in 1991 to attend Wichita State University, where he earned a graduate degree in mechanical engineering. He was employed as a crash-test engineer for Nissan Motor Company in 2010 when he conceived the idea of a toy loom for rubber-band crafting while watching his young daughters make rubber-band jewelry. His prototype, which he called Twistz Bandz, used a wooden board, pushpins, and dental hooks. Encouraged by his family to market the product commercially. He invested $10,000 and found a factory in China to manufacture the parts, which he and his wife assembled in their home in June 2011. Ng renamed his product after discovering an elastic hair band on the market named Twist Band. His brother and niece came up with the name Rainbow Loom.

Efforts to sell the loom online and in toy stores were unsuccessful, however, because customers did not understand how to use the product. Ng started a website and filmed instructional videos featuring his daughters and niece. In summer 2012, Ng received his first store orders from franchises of Learning Express Toys, a specialty crafts chain, and sales picked up. In June 2013 arts and crafts retail chain Michaels test-marketed the product in 32 stores; by August the chain was carrying Rainbow Loom in its 1,100 U.S. locations. Rainbow Loom is also sold at Mastermind in Canada and in specialty stores. As of August 2013, 600 retailers were selling Rainbow Loom at a retail price of $15 to $17. The kits are manufactured in China, and Ng supervises distribution out of a 7,500 square feet (700 m2) warehouse near his home.

In 2013, Ng worked with The Beadery and Toner Plastics to produce the Wonder Loom, a redesigned version of the Rainbow Loom that is made in the United States. The Wonder Loom is sold by Wal-Mart. In April 2014 a travel-sized version of the Rainbow Loom was released called Monster Tail.

During her tour of New Zealand in 2014, the Duchess of Cambridge was seen wearing a Rainbow Loom band bracelet, leading to a spike in sales in UK schools.