Today, because established companies can’t get loans from their normal bank sources, they’re turning more often to microloans. Although microloans are not new, they have gained popularity in the last two years as more traditional lending channels have become unavailable to smaller enterprises. There are two main micro-loan programs with a national footprint. The Small Business Administration (SBA) has a lending program that allows lenders to make a loan up to $35,000 to small businesses. Nationally the average is $10,000. By the beginning of 2010, the loan limit is expected to be raised to $50,000.
A microloan is a perfect type of first business loan for a small business that needs to acquire equipment, computers, or other technology. And beginning immediately, the SBA has more than doubled funds available for their microloan program, to make almost $50 million in new loans in 2009 and 2010.
Unlike other types of SBA loans, microloans are very easy to apply for and don’t have a complicated, lengthy approval process. Many banks, credit unions, and nonprofit community lenders participate in the SBA microloan program. (The SBA doesn’t make microloans directly.)
In addition to making loans to borrowers, the SBA microloan program provides technical assistance to borrowers. In the lending world, microloans are called “high touch” loans because lenders provide borrowers with many services to ensure borrowers succeed and the loan is repaid as agreed. There’s normally no additional cost for technical assistance to borrowers. Programs include classes on management, accounting, sales, operations, and finance. Training and assistance are provided by the micro-lender or a regional Small Business Development Center.
Many business owners that participate in the required microloan technical assistance programs find the training very valuable. An entrepreneur may be very good at making and selling their product or service but may not understand many of the rules, regulations, accounting requirements, and back-end business office information needs of a successful business.
Although borrowers often turn to banks first, many credit unions and community-based lenders are now making SBA microloans. Credit unions haven’t been a traditional place for small business owners to go for loans because federal laws didn’t allow credit unions to serve businesses until 1998. Microloans are perfect business loans for credit unions because they give credit unions the ability to make a small loan to a business member and help the business succeed.
Community lenders are nonprofit or for-profit organizations that are founded on the principles of helping very small businesses with high touch service while creating jobs in often-underserved parts of the community.
Another type of community-based microloan is made by Community Development Financial Institutions (CDFIs). They are chartered and supported by the U.S. Department of Treasury. This 15-year-old program has been highly successful during the last two years as businesses that would have turned to banks for borrowing needs have instead found themselves borrowing from CDFI lenders. 800 CDFI lenders throughout the U.S. have received over $1.2 billion since the program started. Other capital has been brought into the CDFI program by banks, credit unions, and non-profit community development organizations. During 2009, the program received over $100 million in additional federal funding, and the 2010 federal budget has an additional $246 million allotted. Some CDFI loans can reach $300,000 to $500,000 depending on the individual CDFI and with a local bank participating.