There is, at last, good word from the world of small-business finance. The word is "micro."
The Obama administration has revived funding for the micro-lending industry, which targets federal money and provides incentives for banks to support "micro enterprises"--businesses with five or fewer employees, small enough to require initial capital of $35,000 or less. Tiny, indeed, but altogether there are more than 23 million such businesses in the United States, employing about 18 percent of the workforce.
Micro loans range from $500 to $35,000 and typically are administered by local nonprofit lenders in the form of installment loans, rather than lines of credit. Most banks regard micro loans as too costly to administer directly to small-business owners, so nonprofit intermediaries such as the Northeastern Pennsylvania Alliance and the Detroit Micro-Enterprise Fund work with capital from banks and donations from foundations to make loans with limited paperwork, more business assistance and slightly higher interest rates.
The nonprofits operate on a smaller scale, often serving just a few dozen clients, and they usually supplement loans with hands-on training.
A Micro Primer
To find a nonprofit lender in your area, go to microenterpriseworks.org .
For more information on servicesoffered by nonprofit lenders, check out the reports prepared by Aspen Institute's FIELD at fieldus.org .
For an overview on micro loans, see the Small Business Administration website, sba.gov .
The loans are intended for entrepreneurs who would not qualify for a bank loan, so you don't need perfect credit to make a successful application--micro lenders have more flexible underwriting criteria and are willing to take more risk than most banks. Most also accept applications from young, first-time entrepreneurs (as long as they are at least 21), and they welcome minority and women applicants.
There is still a misperception among financing advisors that micro loans are intended solely for minority entrepreneurs or disadvantaged borrowers with poor credit. This is not true. For example, you may have been turned down for bank financing for many reasons, such as the small size of your business, the small size of your loan amount or your lack of collateral. In all these cases, you should consider applying for a micro loan from a nonprofit lender.
The micro-lending industry has been changing rapidly in recent months, too. Faced with competition from online lenders, nonprofit lenders are making it easier to do business with them. Gone are the days of tedious interviews and restrictive demographic criteria for applicants. The quality of business training and technical assistance has improved considerably. And online applications, automated loan processing and credit reporting to Transunion and Experian are becoming standard.
Bottom line: If you dismissed a micro loan last year, it is time to take another look.