If banks won’t lend you money and you need less than $35,000 or so, a good alternative source of funds may be a microlender. Microlenders are nonprofit community organizations that make loans mostly to small, often one-person, businesses, usually in impoverished neighborhoods or countries. Their focus is lending to people who don’t have banking relationships or access to traditional credit.
Microlenders can be a good source of capital for existing small businesses and startups. They typically make loans for equipment purchasing, working capital, hiring, and other business purposes. Some microlenders work with entrepreneurs only after they have been turned down by traditional lenders. The Association for Enterprise Opportunity, a microlending trade group, estimates that the average microloan amount is about $7,000. A typical microlender client is a small business with fewer than five employees.
Unlike banks, which make lending decisions based on strict financial criteria, microlenders take a more personal approach, getting to know the prospective borrower and evaluating the owner’s story and business proposal in depth. A good credit history will help, but microlenders may be more willing to take a chance on a company without assets or someone with a blemished credit record if the business idea is sound.
One advantage of working with a microlender is the additional assistance you’ll likely receive. Microlenders often provide mentoring, business management training, peer support, and other services. They also are typically willing to make very small loans, even as low as $500, where a traditional bank would find such a small amount not worth the bother.
You can find microlenders through two main sources. The Small Business Administration runs a micro-loan program administered by community organizations. You can also locate a local microlender through search portals such as the Microfinance Gateway or through the Association for Enterprise Opportunity. One of the largest U.S. microlenders is Accion USA.
While microlending has been in existence for centuries, modern microlending got its start with the Grameen Bank in Bangladesh, founded by university professor Muhammad Yunus in 1976. His theory, that poor people are good credit risks and will repay their loans and that small loans can make a big difference in lifting families out of poverty, has been proven over time, as microlenders usually enjoy lower loan default rates than traditional lenders. Yunus and Grameen shared the 2006 Nobel Peace prize for their efforts to foster economic and social development. Though microlending has its roots in the Third World, today there are more than 500 U.S.-based microlending organizations focused on American small business lending.
Business reporter Carol Tice contributes to several national and regional business publications.