QA: The Lowdown on Microloans

Two microloan experts answer some often asked questions about microloans.

By Jill Andresky Fraser | 
 

Unlike pursuing traditional bank loans or credit lines, tracking down and qualifying for a microloan generally requires help from a business-support group with special ties to nontraditional lenders. To learn more about how that market works, Inc. interviewed two staffers at the Chicago Women's Business Development Center: Linda Darragh, finance-program coordinator, and Jaribu Kitwana, microloan finance counselor.

Q: How small is a microloan?

A: Generally, these loans run up to about $25,000. But they can be quite small -- often from $100 to $1,000.

Q: Besides size, how are they different from other loans?

A: In many ways. The companies that qualify are generally those that can't get access to any other forms of capital, either because they're start-ups or because they're too small. Sometimes they're owned by people whose personal credit histories are good in general but might include problems that would scare off traditional lenders. But the main way they're different is that microloan lenders approach loan applications with different underwriting standards.

Q: They don't care if a loan is risky?

A: No, they do care. They just define acceptable risks differently. They'll accept collateral that regular banks wouldn't consider: office equipment, for example, or the owner's home washer and dryer. They'll also overlook some types of credit problems if they believe those problems have been solved.

Q: Microloans sound perfect. What's the catch?

A: Microloan interest rates are much higher than typical loan rates because their risks are higher: 12.5% to 15% is common. So a business owner's goal should be to qualify for a microloan, use it to build his or her company to the point that traditional bank financing becomes feasible, and then leave this market. That's why the companies the Women's Business Development Center directs toward microloans are the ones we believe have the potential for profitable growth and a future banking relationship.

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