While it is encouraging that big banks have re-engaged in small business lending, certain types of companies find themselves in a position whereby getting a loan from a commercial bank is unlikely. Startups and small enterprises with less than 10 employees and under $500,000 in annual revenue are likely to encounter difficulty in having their loan requests granted by big banks. In such cases, the business owners may turn to micro lenders, community-based non-profit organizations that make loans to companies that are generally unable to obtain financing from traditional lending sources.
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Typically, micro lenders receive money from the SBA, local governments and grants from philanthropic organizations and then make loans to small businesses. Sometimes the companies that receive money from these institutions have exhausted their lines of credit, maxed out their credit cards, or encountered some type of difficulty that thwarted their ability to secure funding from traditional sources.
Micro loans can be used for working capital and purchases of machinery, equipment, furniture, or inventory. The money may not be used to pay existing debts or to purchase land or buildings. Amounts vary from $5,000 to $100,000, but frequently are in the $10,000 to $50,000 range. When banks are unlikely to provide capital, micro lenders are willing to risk granting loans to people who lack a long earnings history, experience, or significant amounts of collateral.
Because there is added risk involved, interest rates charged by micro lenders can be higher than those charged by commercial banks. Terms depend on the size of the loan request, the planned use of the funds, and the requirements of the lender. Rates generally are between 8 and 13 percent, and the maximum length of a micro loan is six years. Like other financial institutions, micro lenders require some type of collateral, as well as the personal guarantee of the business owner.
The best known micro lender is ACCION, which dedicated to creating economic opportunities for entrepreneurs in 31 countries on four continents. Since 1991, the organization has provided over $119 million in funding to help grow small businesses in the U.S. and strengthen the communities they serve.
Frequently, ACCION makes loans to women-owned and minority-owned businesses in economic empowerment zones. Often the borrowers are from low-to-moderate income levels. In addition to providing access to capital, the organization advises these entrepreneurs on how to better manage their finances.
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Another active micro lender is the Business Center for New Americans (BCNA), which provides financial services to immigrants, women, and other New Yorkers to help them grow their small businesses. Last month, my company connected Mona Khanna, a recent immigrant from South Asia, with BCNA to obtain a micro loan for her beauty salon in Corona, New York, an area known for its cultural diversity. She is using the money to grow her thriving business. On the West Coast, the Opportunity Fund is active in micro lending to help California-based small businesses succeed.
Micro lenders are not a panacea for small company owners, however. By nature, they grant small amounts of money and thus if an aspiring entrepreneur needs more than $100,000 to launch a business, he or she will have to approach a different type of lender. Typically, micro loans average about $12,000, which doesn't go very far in today's economy.
My advice to anyone considering securing funds from a micro lender is to use the power of the Internet to do research. Find out which institutions are active in a particular area and learn as much as you can about them. Looking for a small business loan online is like using Amazon or eBay to find a product or service. The web makes a plethora of information available so that people can comparison shop and find the right deal and the best terms.