Is microlending the new wave in small business lending? Is it a solution for your cash-strapped business? Maybe, if you meet some fairly liberal criteria. For instance, you might be a good candidate if you have a high credit score and your business has a track record.
Who are these microlenders? Here are just a few to get you started: Accion USA, Colorado Enterprise Fund, and Opportunity Fund. Each state and region has organizations that focus on microlending, but they all have a few things in common:
- They’re nonprofits.
- They’re financed by various funding sources.
- They’ve seen significant increases in applications from small business owners who just a year or two ago had no problem getting a bank loan but can’t get one now.
Loan Amounts And Limits
Microlending generally refers to loans of less than $50,000 — dovetailing with the minimum business loan of $50,000 at most traditional banks. Loans usually range from $1,000 to $25,000, but each microlender has different ranges and minimum and maximum loan amounts. In exceptional cases some microlenders may provide loans of $200,000 or more for very well-qualified borrowers.
Interest rates are often well below those of credit card companies and finance companies. In August 2009 both Accion USA and the Colorado Enterprise Fund were posting rates between about 7 percent and 15 percent (plus closing costs of 1 percent to 5 percent that are folded into the loan). Generally the interest rate is equivalent to the prime rate plus 3 percent to 5 percent.
The payment terms are generally flexible and the loan period can go up to 60 months to 84 months with most microlenders.
Microloans come with strings attached. While each lender is different, some of the key limitations include restrictions on the types of businesses that can be financed and restrictions on what expenses the funds can cover. Many lenders will not finance bars, liquor stores, and real estate development. Investment-oriented businesses may also be excluded from getting microloans. In addition, you may be precluded from using the loan proceeds for your salary, personal expenses, delinquent taxes, and other purposes.
What Will Microlenders Require From You?
The specifics vary from lender to lender, but as a rough guide, expect the following:
- The lender will pull your credit report. The better your history the more likely you are to get a loan. Keep in mind that these lenders are able to work with you when traditional banks can’t or won’t. So less-than-perfect credit is not an automatic deal-breaker.
- The lender will usually want a reasonable amount of collateral to serve as a back-up means of loan repayment. The newer your business the more collateral the lender is likely to want.
- You’ll need to show an equity stake in the business — generally between 10 percent and 50 percent — and not merely sweat equity. The newer your business the more equity you’ll likely have to contribute.
- The lender will want to see financial statements proving that your business is viable (that you have cash flow to enable you to operate the business and repay the loan).
Microlenders are generally nonprofits on a mission to help community members and businesses that are traditionally underserved when it comes to accessing credit. That means they have more flexibility in offering loans to businesses that don’t meet bank lending parameters. But they’re also in business — meaning they’re seeking clients that are able to repay so they can keep on lending.
Janet Arrowood is a freelance technical, business, insurance, and financial writer in Denver. She can be reached at email@example.com.