Micro loans and microfinance have come to the United States. Micro lending to small businesses has become commonplace in the U.S. economy. Since the Great Recession, the face of business lending has changed. Traditional banks took such a hit during the recession that they tightened credit to businesses. Business owners’credit ratings and credit score took a hit because, suddenly, they didn’t have the cash flow to pay their bills and profits fell off. Traditional lending relies heavily on a businesses’ credit score to make lending decisions.
The unemployment rate has been high during and after the Great Recession. People have started businesses simply to have a job. The landscape of borrowing and lending is quite different than before the Great Recession.
The U.S. relies on small businesses to create jobs. Without being able to borrow money, it is impossible for that to happen. Businesses have had to become creative when trying to find financing. This is where microlending comes in.
What is a Micro Loan?
A micro loan is a very small loan; sometimes so small that a bank would not possibly make such a loan. It is a loan that can allow a small business to startup when otherwise that business may not be able to get the financing. It can be a loan to help a business out when it is suffering a poor cash flow position. If a small company sees a growth opportunity, a micro loan could even help the business real that growth. Micro loans started out in third-world countries helping poor farmers and other business people. Now, microfinance is helping businesses in the U.S. It may also be called peer-to-peer lending.
What Factors Do Lenders Consider When Making Micro Loans?
The good news for borrowers is that lenders don’t just consider a borrower’s credit score or amount of existing collateral. They use subjective factors as well. Lenders will actually go out and meet borrowers and take a look at their business. They consider the borrower’s character and whether or not they think the borrower will repay the loan. Microlending is the last bastion of character-based lending.
Who are the Lenders of Micro Loans?
The lenders of micro loans are private, non-profit intermediaries currently available in all states and the District of Columbia. A government source of micro loans is theSmall Business Administration Micro Loan Program.
What are Micro Loans Used for?
Micro loans can be used by business start-ups, by businesses who need a cash flow boost, by businesses for such things as working capital, supplies, inventory, and light machinery and equipment. There are cases where micro loans have saved businesses during the Great Recession and other cases where businesses have been able to start up only because of a micro loan.
What Amount of Money is Generally Available for a Micro Loan?
Micro loans can range from less than $100 to around $35,000. The average maturity is calculated at about 42 months with the due date at 60 months.
What is the Interest Rate on a Micro Loan?
Most loans require some sort of collateral and a personal guarantee. Interest rates vary but are higher than on a typical business loan.
How Easy is it to get a Micro Loan?
Most lenders of micro loans consider the best use of micro loans to be for businesses who have no history with a bank. If there is a non-profit, community lending organization for micro loans near where your business is located, you can probably negotiate a micro loan with them depending on your circumstances. If there is not amicro loan lending organization in your community, however, it becomes more difficult. There may be state and local government programs you can tap that have micro loan funds.
If you are a small business looking to start up, to bail yourself out with regard to cash flow, or if you’ve really never had a relationship with a bank, microfinance and micro loans might be the first step for you. It could be you on the right course for a successful business in the future.
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