Microlenders, as the name suggests, provide funding in amounts less than $50,000 to help entrepreneurs and some not-for-profit corporations launch and expand. The average microloan is usually in the $11,000 to $13,000 range. These loans often go to minority and immigrant entrepreneurs and start-up companies that are based in economic empowerment zones.
The SBA provides funds to designated intermediary lenders, often nonprofit community-based organizations and larger ones, such as Accion East, that have experience in funding start-up and growing companies. Each intermediary lender has its own eligibility requirements, including the personal guarantee of the borrower or some form of collateral.
Microloans can be used for startup costs, working capital, inventory and supplies, machinery and equipment, furniture and computers. The funding should not be used to cover an entrepreneur's existing debts.
Naturally, interest rates and repayment terms vary according to the financial institution's lending criteria, amount of the loan, length of the loan (a maximum of six years for an SBA-backed microloan), use of the funds, and other factors. Often, the interest rates for a microloan are between 8 and 13 percent.
Typically, the companies that apply for microloans are startups or firms in operation for less than one year or that have credit scores in the 550-650 range. A high proportion of them are minorities and women and many times big banks won't lend to the borrowers who are in these circumstances. Microlenders typically charge 9-15% percent, as compared to cash advance companies that charge 30-40 percent interest.
Thus, small business owners are much better off applying for a microloan than they would be taking payday loans or cash advances because the interest rates are too high. Financing with a 30-40 percent interest rate creates of Catch-22 situation of having to work hard and pay a disproportionate amount of earnings to companies that charge rates that rival those of loan sharks.
Increasingly, lenders such as Accion, the largest microlending organization in the country, allow online applications. Small business owners are usually time-crunched and simply are not able to visit lenders in person and fill paper forms with no guarantee of funding. Using technology streamlines the process, while eliminating geographical constraints. Thus, someone in New York can secure capital from a microlender based in California that he or she might not previously had known existed.
Sometimes microlenders require borrowers to fulfill certain training obligations requirements designed to provide advice on launching or expanding business before their loan application will be considered.
In the future, more microlending organizations must incorporate technology better, allow for online applications. Most of them do not have online capabilities, and if they do, it's often not user friendly. The Biz2Credit platform enables microlenders to reach thousands of customers that they might not have access. This is the direction that all small business loans are going, not just microlenders
In many cases, business owners who secure microloans are immigrants or women who have little or no credit history or poor credit history. It is difficult for them to get funding from a traditional bank--especially if they are launching a start-up company and do not have much in the way of collateral. That's when microlenders play such a valuable role.
Later, after they are up and running and have paid the microloans back on time, business owners may be in a position to qualify for SBA loans at lower interest rates and other traditional types of funding in amounts larger than $50,000.
One success story that I like to point to is the owner in Queens, NY, who received a $15,000 microloan and did so well in business that in less than a year she secured more funding and opened a second shop. In my experience, around 65% of companies that take microloans will eventually apply for funding. This is a very good thing because it means small companies are growing.