Small-business owners know how tight credit is in the current economy. But many entrepreneurs who can't get a traditional bank loan may be eligible for something called a microloan.
They're called microloans because they are generally small, short-term loans given to small businesses—often businesses that don't have the collateral or the credit to secure loans in other ways. The Small Business Administration says while microloans are available in amounts up to $50,000, the average microloan is $13,000.
In the microloan program, the SBA gives the funds to a non-profit, community-based lender. The lender has to have business experience and is required to provide training and technical assistance to the borrower.
Small-business owners have to work through the intermediary lender to get microloan financing and are subject to the credit requirements of the lender. Bob Jacobs, President of Robert A. Jacobs & Associates, a company that brings consumer products to mass market retailers, was recently awarded an SBA-backed microloan.
Jacobs' $24,000 business loan came through TMC Working Solutions in San Francisco. Jacobs says TMC has provided him with a mentor and a financial advisor. "Needless to say, I'm looking forward to working with both counselors for the next three years so I can learn as much as I can about each of their areas of expertise," Jacobs says.
There are restrictions about what SBA microloans can fund. They can be used for:
- Working capital—purchase of inventory or supplies
- Purchase of furniture or fixtures
- Purchase of machinery or equipment
SBA microloans can't be used to pay off existing debts or to purchase real estate.
Jacobs will be using his loan for operating expenses, which include purchasing inventory and for the travel expenses he incurs while meeting with retail buyers.
The CDFI, or Community Development Financial Institutions Fund, is part of the U.S. Treasury Department. The CDFI provides money and tax credits for organizations that promote development in urban and low-income communities. That development can include loans for startup businesses. Organizations that want to be a part of the CDFI have to apply for certification first and funding second.
Friends, Family and Foundations
Microloans don't have to come from banks or other financial institutions.
Liz Long, with Bag the Habit, a manufacturer of reusable shopping bags, says her company has been using microloans from different sources to support inventory growth for the past year.
"We have worked with the Tory Burch Foundation and The Intersect Fund as well as gathered family and friends together in a Kiva-like fashion," Long says. "They pool money, give us a loan, and we repay them plus a percent of the profits we make when selling the inventory. We call that our 'Personal Shares Program.'"
Kiva is a non-profit dedicated to connecting lenders with people intent on eliminating poverty. Someone can apply for a Kiva loan and once it's approved the funds become immediately available. After that, Kiva looks for a lender within its network. As the borrower repays the debt the money goes back into the lender's account and the lender can decide to cash out or reinvest. Kiva reports than more than 70 percent of its lenders choose to reinvest.
Carla Turchetti is a veteran print and broadcast journalist who likes to break a topic down and keep her copy tight. That's why this bio is so brief! Carla blogs via Contently.com.