The Small Business Administration (SBA) offers a microloan program to help banks and other community based lenders meet the needs of very small borrowers who may not otherwise be able to obtain credit from a bank. The most a lender can loan under the SBA microloan program is $35,000. Other community based programs that operate under another federal program, Community Development Loan Fund, (CDLF) can make larger loans up to about $200,000.
Unlike larger loans, most SBA and other microloans are administered by community non-profit lenders rather than commercial banks. Commercial banks report they only make a few SBA microloans because the cost to administer the program is too high.
Community and CDLF lenders generally operate in a small geographical area. For example, in
Often the funding for CDLF lenders comes from loans made to the non-profit lender which are secured by federal grants. Other programs offer very substantial tax credits for investing in community based lending organizations.
Lenders who choose to use the SBA microloan program are also often community based lenders, often organizations that are multi-bank organizations that share the administration costs and provide some lending talent and referrals. Some of the SBA micro lenders are for profit organizations; however, that doesn’t lessen the access to capital by the borrower. Non-bank, for profit lenders typically don’t make other kinds of loans, so they tend to be very good at making and administering microloans.
If you are starting a business, looking to buy a very small business, possibly have less than stellar credit, community based micro lenders are a good place to start. Unfortunately they are often a little hard to find in some communities because they don’t advertise and often maintain a lower profile than other types of lenders. I have been a commercial loan officer in and around
An example of a company that successfully used a microloan to expand their custom cabinetry business. They designed and manufactured cabinets and custom book cases for high end luxury condominiums and commercial customers like law firms and banks. The company was a few years old and had a very stellar reputation as the “go to guys” for building custom cabinetry.
They have two locations, a showroom in a rather expensive location for clients to come in and work with their designs and choices, and an inexpensive manufacturing facility where they owned or leased equipment used to manufacture and install the fine cabinetry. This part of their business was profitable and growing, but management saw a market to distribute and install cabinetry that was pre-manufactured that was also manufactured by a high quality European company. His goal was to offer the line of European cabinetry to the large numbers of luxury high rise condominiums being build in the area. The business owner chose to borrow $35.000 to use for outfitting his showroom with his European line as well as having some permanent working capital to allow him to grow this new line of business. The business owner wasn’t traditionally bankable because of a several year old bankruptcy. While the micro lender normally would not loan money specifically for working capital, the borrower had enough equity in equipment and vehicles to provide collateral for the loan. This loan was made 2 years ago, and the company is thriving and profitable.
Additionally, the company was able to diversify its business some which helps lesson risk in a time of economic uncertainty.
While microloans by definition don’t provide much capital, they do meet the needs of thousands of borrowers who might otherwise not have access to any capital.
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