Finance Your Own Business. Garrett Sutton
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Microloan program loans are offered to small business concerns and certain not-for-profit childcare centers. Designed for survival-mode businesses, microloans aren’t intended for paying existing debts or purchasing real estate. They may be used for the following:
• Working capital
• Purchase of inventory and supplies
• Purchase of furniture and fixtures
• Purchase of machinery and equipment
Because of the terms and amounts of microloans, SBA microloans come with a shorter term and higher interest rates. The maximum length is six years, and rates range from 8–13 percent.
Microlending at Work
CAMEO, the California Association for Micro Enterprise Opportunity, demonstrates the power of microlending. According to Claudia Viek, their CEO, CAMEO has been creating jobs since its inception in 1993 by helping people to be their own boss or, in other words, to create their own job. Their mission is to grow a healthy, vibrant, thriving environment for all entrepreneurs and start-up businesses by advancing the work of their statewide member network.
Cameo’s 85 member organizations provide the entire spectrum of entrepreneurs with small and micro-business financing, technical assistance and business management training. In 2013, CAMEO members served 15,000 very small businesses that supported or created thousands of new jobs in California and generated over a billion dollars in economic activity. This success is possible because members offer a rich continuum of business services. Research in this field shows that businesses that receive assistance have an 80% success rate as compared with the 50% to 80% mortality rate for small businesses overall.
In other words, they don’t just make loans. They help businesses succeed.
As California’s statewide Micro Enterprise association, CAMEO expands resources and builds the capacity of member organizations. For example, CAMEO works with corporations and government to leverage new capital and grants. Wells Fargo, Chase Bank and even Chevron have made significant new investments and grants to microlenders. However, achieving scale in microlending has significant barriers. Operating costs are high due to a small capital base and the extra expense of providing technical and business assistance. CAMEO has put in place innovative online platforms to scale up microlending in California. Because lending requires volume the platforms reduce operating costs and facilitate small business capital.
Not every state has a microlending organization like CAMEO. For more information on them visit www.microbiz.org. But there are micro lenders out there, as we will discuss.
The Landscape of Microlending
A recent opinion poll by Small Business Majority, Main Street Alliance and the American Sustainable Business Council found that “90 percent of small business owners believe the availability of credit is a problem, and three in five say it is harder to get a loan now than it was four years ago.” The larger banks have pulled back on loans under $250,000. The problem is the small loans cost about the same in transaction costs as a $1 million loan. So if traditional banks aren’t lending where can small businesses find funding to run their businesses and help with cash flow?
The answer is to look for alternative lending sources, such as microlenders and community development financial institutions (CDFIs), including community development credit unions.
Microlenders/CDFIs often make loans under $50,000. These loans include those financed by the Small Business Administration Micro Loan Fund, USDA Rural Development loans and community development loans by local governments, banks and donors. Microlenders place more emphasis on cash flow than collateral, and give more weight to the character of the borrower.
Community Development Financial Institutions
If you’ve been in a Starbucks in recent years, you may have seen red, white and blue bracelets offered for a donation of $5 or more to the Jobs for USA campaign. Starbucks joined forces with Opportunity Finance Network, a network of Community Development Financial Institutions (CDFIs), to help raise money for loans to small businesses and seeded this campaign with a $5 million donation.
If you donated to the campaign, as the authors of this book did, you may not have entirely understood what you were supporting. In fact, it’s possible that this campaign could become a source of funding for your business, or that of someone in your community.
CDFIs include non-profit loan funds, credit unions, banks and venture funds that focus on making loans to underserved communities. In addition to making personal loans, they are often a crucial source of funding for small businesses that have been turned down for loans from traditional sources. CDFIs may provide funding for small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing.
The group that Starbucks partnered with, Opportunity Finance Network, has originated more than $30 billion in funding in urban, rural and Native communities. In particular, CDFIs often focus on low-income and/or minority communities, though applicants shouldn’t be discouraged from reaching out to one if they are having trouble getting funding and don’t meet any of those criteria.
If you apply for a loan through a CDFI, you should expect that the lender will run a personal credit check on you, the owner. It’s likely that your credit score will be considered in the application process; but it’s usually only one part of the decision and most CDFIs will tell you that even with past credit problems you may still be eligible for loans. In addition, CDFIs may be able to consider non-traditional credit references, such as rent or utility payments, for example.
Typically, these loans require collateral and/or personal guarantees as well.
CDFI’s offer loans of varying sizes including microloans as well as some that go as high as $250,000. Many CDFIs provide small-business coaching and other professional resources, such as legal, accounting, and marketing assistance, to grow their borrowers’ small businesses. CDFIs usually:
• have more flexibility with their collateral and credit requirements (they accept good, but not perfect credit)
• are willing to consider explanations for lower credit score (such as loss of home equity, late pays, illness)
• consider the character of the borrower
• offer reasonable loan terms and try to make sure the borrower thoroughly understands them
However, businesses still need to show the ability to pay back the loan through positive cash flows and have a marketing plan to guide growth. The loan criteria is often listed on the lender’s website and vary in terms of a business location, loan size, interest rates, risk, or borrower income.
CDFI’s want to “make loans that change lives,” says Mark Pinskey, President and CEO of Opportunity Finance Network.
Finding Microlenders
The first real step is to research alternative lenders in your area or those that lend online without regard to geographical location. Look for an established government agency or nonprofit, such as Community Development Financial Institutions and credit unions. Some city and county governments run microloan programs. Talk with your local economic development or business development agency. Other good sources for loans referrals are Small Business Development Centers and micro enterprise development organizations. While most of them don’t lend money, they are often connected to the capital resources in their communities. (See lending and business resources in the Resource Section.) Opportunity Finance Network also maintains a free locator service for member programs on its website.
The second step to finding a small or micro-business loan is to make sure that you are loan-ready, i.e. that you meet the criteria. That means that you have satisfactory answers to the following:
• What is the purpose of the loan?
• How the loan will be repaid?
• What is Plan B for repayment?
• Do you have a business plan?
•