Thanks to tighter credit standards and stricter regulatory scrutiny, many small businesses have found it difficult—or impossible—to get a bank loan.
A federal proposal to launch a $30 billion fund aimed at boosting lending could help. But, in the meantime, a growing number of companies that might not have been able to get a loan from a traditional bank have been flocking to microfinance institutions, instead.
Called community development financial institutions (CDFIs), these organizations include community development banks, credit unions, loan funds, and venture funds “dedicated to serving small businesses and others who are outside the financial mainstream,” says Mark Pinsky, CEO of Opportunity Finance Network, a network of microfinance groups based in Philadelphia.
Some provide loans of up to $35,000 to “anybody having trouble getting access to credit,” says Pinsky. Others lend amounts of up to $200,000 to small businesses.
But, most important, the approximately 700 CDFIs in the U.S. have dramatically different lending criteria from the usual bank standards. They include an eclectic mix of such factors as a good credit score and relevant industry experience. You also need collateral, but often that can mean anything from a car to a television.
Then there’s the matter of past problems. Even if you’ve had some sizeable ups and downs, you’ll still be in the running, according to Jim Olp, senior business consultant with the Denver Metro SBDC. He points to a client who wasn’t able to get financing from a traditional bank to buy new machinery, thanks to a previous business failure. She recently received a loan from a microfinance lender.
It’s no surprise, then, that more small businesses have been seeking such loans recently. According to Opportunity Finance, the number of new loans at 16 microfinance organizations made in the fourth quarter of 2009 grew 69 percent from the same quarter the year before. Of 32 small-business CDFIs, 68 percent saw an increase in applications and 56 percent had a rise in loan originations.
If you’re thinking of approaching a CDFI, here’s what you should know:
Look for a CDFI near you. Your first step, of course, is finding an appropriate institution in the area. One way to do that is through opportunityfinance.net, where you can search by state, city or lending type. Another possibility is to visit CDFIfund.gov on the U.S. Treasury Department’s website. Or contact a local small business development center for suggestions.
Bring as many records as you can. There are no hard and fast rules for the documents you need to present. But, it’s best to supply whatever you have, from bank statements to your balance sheet. You can provide a business plan, too, although it doesn’t need to be formal. “It can be what’s in your head,” says Pinsky.
Expect a give and take. CDFIs start out with the philosophy that they really want to lend. For that reason, “We will work very hard to find a loan to fit the borrower,” says Pinsky. To that end, the typical CDFI loan officer will analyze your situation—from your business plan and product mix to your accounting systems and financial statements—to look for ways to help. Often, for example, applicants discover that sloppy bookkeeping has been slowing down their progress and, says Pinsky, “We’ll provide some hands-on technical assistance to get that stuff in order.”
In fact, according to Pinsky, since the downturn, CDFIs have been providing more than the usual amount of support to applicants, looking especially carefully at areas of weakness and, when necessary, making introductions to local experts who can help. “We haven’t slowed down our lending, but we’ve changed our approach,” says Pinsky. “The economy’s been tough on everybody.”