Microloans Serve as Small-Biz Lending Alternative

With commercial bank loans now a distant memory for many small businesses, many start-ups can still turn to nonprofit microlenders for financial support.



At its inception in 1992, the microloan program developed by the Small Business Administration (SBA) was geared toward start-ups and newly established small businesses. The microlenders in the program, nonprofit community-based intermediaries funded by the SBA, also lent to business owners with spotty credit or slim experience, and provided business counseling along with the loan.

Today, however, established businesses with high credit scores are also approaching microlenders. “Applications are rising in part because the home-equity loans that small businesses used to take out to fund their operations are harder to secure,” New Jersey business journal NJBIZ says. “Companies that seek commercial loans find banks want more collateral, and aren’t willing to provide 100 percent of the financing.”

Sara Ignas, spokeswoman for the Association for Enterprise Opportunity tells BusinessWeek this month that the microlending trade group’s members “have seen an increase in demand for loans from those who a year ago could get a bank loan.”

BusinessWeek reports that Accion Network, which has eight branches across the country, saw 905 applicants with credit scores of 700 or greater in the first nine months of 2008, a 43 percent jump over the same period in 2007. At Opportunity Fund, a microlender in California, 16 percent of applicants in the second half of 2008 had credit scores above 700, compared with 7 percent in the first half. And at Community First Fund in Pennsylvania, applicants in the second half of the year averaged a credit score 53 points higher than those in the first half.

Also, banks that are turning down clients because of tightened lending requirements are referring those former customers to microlenders.

Loans from microlenders can be less than $100 and can go up to $35,000. The interest rate can be negotiable, but it tends to be higher than for standard business loans, Entrepreneur.com explains. The average loan size is $10,500, with an average loan maturity of 42 months. The maximum loan term is six years. Microlenders can also serve as a subordinate lender to banks, sometimes enabling the loan to be increased to $50,000, NJBIZ notes.

Small businesses looking into getting microloans should keep in mind that each intermediary lender has its own lending and credit requirements, the SBA notes. Also, intermediaries generally request some type of collateral and the personal guarantee of the business owner.

Although business plans aren’t required at all levels, Millard Owens, former director of microlending with Self-Help, a nonprofit commercial development financial institution, tells Entrepreneur.com that “borrowers must have a complete understanding of their market, capacity and competition.

“Previous financial statements are required for existing businesses,” Owens continues, “but in the case of start-ups, personal tax returns are often substituted.”

For help finding a microloan lender, the SBA provides a listing of all the intermediaries that are part of the SBA’s microloan program. There are microlenders in 46 of the 50 states, Washington, D.C. and Puerto Rico. If your business happens to be in Alaska, Rhode Island, Utah and West Virginia, you may have to find an alternative, as intermediaries distribute funds in their own communities or regions.

Microloans are a small part of SBA lending, but because of hard times, their numbers have held up whilst SBA loans have fallen dramatically overall, James Kocsi, SBA district director for New Jersey, tells NJBIZ. “New Jersey SBA lenders made about 30 percent fewer loans in the fiscal year ended Sept. 30 than in the prior year, but microloan activity didn’t fall off.

“It’s a good sign microloans held steady,” Kocsi continues. “This is a viable alternative for those businesses that need small dollars. For a small home-based business or start-up that can be rolled out for under $35,000, this is a real good source to look at now.”

Resources

Micro-Loans
U.S. Small Business Administration

Microloans Fill a Small-Business Cash Need
by Beth Fitzgerald
NJBIZ, Jan. 12, 2009

How-To Guide: Microloans
Entrepreneur.com

As Credit Dries Up, More Owners Seek Microloans
by Louise Lee
BusinessWeek, Feb. 13, 2009

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