New York City entrepreneur Rhoda Plotkin had an idea for her company’s line of LifeField Buckwheat-brand flour, cookies, and pancake mix she couldn’t wait to try out. But there was a catch: The 13-year-old firm, R. Plotkin and Associates Inc., needed $3,500 for new equipment and packaging to create a test batch of the still-secret confection.
Ordinarily, the company, which sells to more than 50 grocery and health-food retailers in the Northeast, could have tapped its $10,000 credit line for the funds. But the line was terminated at the end of 2008, despite a perfect payment record, when Plotkin’s lender abruptly stopped offering services to small businesses. Now she was unable to find a bank willing to make such a small loan: Most institutions she tried were uninterested in loans below $500,000.
Today, Plotkin’s new machinery is humming and her buckwheat product is ready for test marketing. She got the loan she needed last summer from one of the country’s biggest nonprofit microlenders, Accion USA.
“The banks don’t care about companies like mine,” says Plotkin, whose company expects to bring in $45,000 this year. “But organizations like Accion are devoted to getting small businesses on their feet.”
Funding Grows for Microloans
Microlending began in the 1970s with the Grameen Bank in India, which made loans as low as $50 to small groups of entrepreneurs in developing countries that had no hope of receiving typical bank financing. The concept arrived on U.S. shores about 20 years ago and has grown into a lending niche that makes $500 million in small loans annually, according to Accion’s Laura Kozien.
Essentially, a microloan is a small loan -- sometimes as small as $100 -- typically distributed by specialized microfinance institutions. They fill a critical need for small businesses and microbusinesses that don’t need or can’t afford or can’t qualify for a larger bank loan.
In the past 18 months, microlenders have garnered additional funding support as they strive to help the many small businesses, such as Plotkin’s, that have gotten the cold shoulder from traditional lenders during the economic downturn. Here’s a look at new programs and funding initiatives:
- Citi announced a $200 million microloan initiative in May. The Communities at Work Fund has since loaned $60 million to small businesses through lending partners across the United States. The loans carry a low 4.35 percent interest rate.
- International microfinance Web portal Kiva.org began offering loans of up to $10,000 to U.S. businesses in June 2009, and it has facilitated $1 million in domestic loans to date. Recently, Kiva expanded thanks to a $1 million grant in October from credit card giant Visa. Kiva President Premal Shah says Visa’s infrastructure grant will enable Kiva to solicit an additional $10 million in loan funding.
- The federal stimulus bill of 2009 added $47 million in new loan money to the Small Business Administration’s Micro-Loan program. SBA Microenterprise Development Branch Chief Jody Raskind says much of that money has been distributed to SBA’s loan partners in the field and is available for lending now.
In addition, in September new legislation raised the SBA microloan limit from $35,000 to $50,000. Raskind says the increase is meant to help bridge the gap for small businesses that, prior to the economic downturn, might well have obtained a traditional bank loan.
Different Flavors of Microloans
There are several types of microloans currently available in the United States. Each microlender has its own rules and methods for connecting small business owners with the loan funds they need.
- Microlender loan: Getting an SBA or Communities at Work microloan involves either finding an approved local lending partner and visiting its office for assistance in applying or filling out an online loan application. Though requirements vary by lender, applicants generally need at least decent credit, especially for the SBA. Borrowers may be asked to put up collateral such as a bank account or home equity to win loan approval. It’s a fairly private process in which your business information is shared only with your loan officer and other decision makers at your lender.
- Peer-to-peer loan: By contrast, nonprofit Kiva operates a peer-lending Web portal where small business owners apply for loans and post their stories online to solicit donations. Kiva investors may be open to funding an entrepreneur with bad credit if they have a compelling personal story and a solid business idea. Peer-site borrowers do not have to put up collateral.
If site visitors are interested in helping, they donate $25 apiece or more. The funds are then pooled by Kiva to make up the loan total and distributed to the borrower.
If you aren’t shy, using Kiva offers a promotional advantage that an SBA-backed microloan does not, notes Shah. With 80,000 site viewers a day, the Kiva website is ranked well by search engines, and having a borrower profile on the site can help small businesses improve their own search rankings, drawing more customers.
That’s not the only advantage of having a large pool of small, individual lenders instead of one microloan institution backing your business. “We had one business where the owner wanted the money in part for computers,” says Shah. “And one of the lenders shipped two used computers to the client. Other lenders might visit the store or write a Yelp review of the business. You get [hundreds of] people who are making a bet on you and are excited about your business.”
- Lending circle: While most U.S. microlending goes directly to individual business owners, 2-year-old microlender Grameen America is using the lending-circle model pioneered by its international microlending parent organization, Grameen Bank. Since 2008, Grameen America has loaned $6 million to 3,000 entrepreneurs in three New York City boroughs and Omaha, Neb. Grameen borrowers form groups of at least five business owners and receive their loans as a group. The group decides how to distribute its money and meets weekly to collect loan payments and offer support. Risk is spread here because all of the borrowers jointly guarantee the loan, so it can be easier for a startup or bad-credit entrepreneur to get a microloan through a lending circle.
Steps to Getting a Microloan
Considering a microloan? Here are the basics steps in the process:
- Determine eligibility. Parameters differ in each microlending program. Carefully check program rules to see whether your business qualifies and if the lender offers loans in the size you need. Some microlenders work only with low-income applicants or only lend to businesses in their geographic area.
Accion’s Kozien says, “What drives Kiva lenders is a business owner in a homegrown business in a developing phase, with an interesting personal story.”
- Decide on a microloan type. Consider your business’s financial needs and your own personality in choosing a microlender. For instance, if you’re a very private person, you might not want to post your story on a public lending portal such as Kiva. If you need a larger microloan, you may need to turn to the SBA, as it offers the highest borrowing limit.
- Apply. You apply for any type of microloan just as you would apply for a traditional bank loan, by filling out an application in person or online. You’ll need to share your business financials and undergo a credit check. On portals such as Kiva, prospective individual lenders may ask questions about your business.
- Talk terms. Bad credit is less of a handicap in microlending than in traditional lending, but it can affect the interest rate and terms you’re offered.
For her first microloan with Accion several years back, Plotkin had to pledge a bank account as collateral against the loan. Her payments helped build her business’s credit rating and made it easier to qualify for additional microloans.
“I was able to establish an excellent record,” she says. “I’ve never been late on a payment.”
Resources for Small Businesses Seeking Microloans:
- The Association for EnterpriseOpportunity, a microlending trade group
- SBA Micro-Loan portal
- SBA’s list of approved lending intermediaries
- Kiva partners in North America
- Community Development Financial Institutions partnering with Citi in its Communities At Work Fund
Business reporter Carol Tice contributes to several national and regional business publications.