A Tough Economy Toughens Up the Availability of Micro-Lending
By Nora Caley

Banks have implemented stricter lending requirements lately, making it difficult to finance a small business. The good news is micro-lenders, organizations that make small loans to small businesses, are still lending, and will soon have more money to lend.

George Dale, chief of the micro enterprise development branch for the U.S. Small Business Administration in Washington DC, says the number of micro-loans and the loan amounts decreased in recent months, but at the same time, more people are applying for micro-loans. “The traffic to intermediaries’ offices has picked up,” he says. “There has been a lot of volume from people who were laid off and want to start their own business.”

The American Recovery and Reinvestment Act of 2009, also known as the stimulus package, includes $730 million for the Small Business Administration. Of that total, $30 million will go to the micro-lending section of SBA, including $6 million for loans and $24 million for technical assistance, through September 2010.

Micro-lenders want to take few risks, so the key to being approved for a loan is to make sure you demonstrate that your business will not only survive the current recession, but grow in the future.

How to Find Them
If you do a web search for micro-lenders, that will get you everything from economic development agencies in third world countries to peer lending web sites. The SBA defines micro-lenders, or micro-loan intermediary lenders, as a nonprofit community-based lender that makes loans up to $35,000 for eligible borrowers. The organizations must also offer technical assistance, which means classes or one-on-one counseling. The SBA funds these organizations, which also get funding through donations and other sources.

To find an intermediary in your area, start with the SBA’s web site, www.sba.gov. Click on Services, then Financial Assistance, then SBA Loans. There is a section on Micro-loans. Midway through that page, click on the link to SBA Microloan Intermediaries. That opens a list of about 160 neighborhood redevelopment corps, economic development associations, and other similarly named organizations.

The average loan amount is $13,000, and the maximum term is six years. The interest rates vary, but they are usually eight to 13 percent. A longer loan term might have a higher interest rate.

Another source is the Arlington, Virginia-based Association for Enterprise Opportunity (AEO). To find a micro-lender that is a member of AEO, visit www.microenterpriseworks.org, then click on Resources, then find an AEO Member near You. Some of these organizations are the same ones as on the SBA list. Some are not SBA intermediaries, so they can have slightly different rules regarding interest rates and loan amounts. Some charge application fees.

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Applying for Micro-Lending Loans
Each lender has its own requirements. You need to have collateral such as a vehicle or business equipment, and proof of the value of the items you want to use as collateral. Other requirements include that you cannot have had a bankruptcy within the last 12 months. You must be able to prove a stable source of income.

You might not be considered if you currently have an adjustable rate mortgage. You might be asked to show your tax returns, credit reports, and copies of permits and licenses you need for your business. You may have to attend classes or take other training on topics such as business plan writing, accounting, or marketing.

Be prepared to fill out some forms. You might be asked to fill out a Personal Household Worksheet that shows your income and your monthly payments, such as mortgage, utilities, credit card payments, and child care. The micro-lender might also request a co-signer, someone who does not live in your household, is not a principal in the business, and has a good credit history.

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Final Advice
Laura Kozien, director of communications for ACCION USA (www.accionusa.org), a micro-lender based in New York, says borrowers need to improve their personal credit before applying for a business loan. “We recommend getting up to date on all of the bills that you might be behind on, because most micro-lenders will look at that and see you are struggling with that,” she says.

Dale’s advice is to write a business plan that shows the type of business you want to start, the products or services you will offer, your pricing, who your competition is, who are your probable customers, and how much revenue you expect to generate. Be realistic with your projections. “The financial section is key,” Dale says. “Not only now but over time, how am I going to finance this over two or three years?”

It should take a month or more to find out whether you’ve been approved. HBM

Nora Caley is a freelance writer based in Denver. She specializes in business articles.

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