Microcredit originated in the Third World as a way to help poorer people launch very small businesses. But now thousands of U.S. entrepreneurs are turning to microcredit as an alternative to traditional lending.
Many microlenders, most of which are nonprofits, receive the bulk of the funds they lend out from the Small Business Administration. There are certain requirements borrowers must meet to qualify for a microloan, but the requirements are much less stringent than those at traditional lenders.
Microloans for small business offer a variety of benefits.
The SBA requires that microlenders provide business and technical training to their borrowers. This educational component, which microborrowers must fulfill before their application is accepted, is a step in the right direction.
With sound business training and planning, more startups can avoid costly mistakes and are more likely to be successful in repaying their microloans and building a solid credit history in the process.
Another aspect that makes these loans attractive is the flexible guidelines for loan approvals. While many lenders are unwilling to approve a loan unless you have pristine credit, business history, and sufficient collateral, microlenders take other factors into consideration.
These may include personal collateral and a personal guarantee. But what truly separates microlenders from traditional lenders is the personal touch. Microlenders take a more hands-on approach with their borrowers and even go so far as to contact personal references.
Microloans provide a pathway for small business owners to build or rebuild their personal credit history. Many applicants have little or no credit history and don’t have the collateral that larger businesses can use to secure a loan, such as commercial real estate, accounts receivable, or inventory.
As a small business owner makes payments on a loan, the microlender reports its payment experience to the credit bureaus. This builds positive credit history and increases a business owner’s level of creditworthiness in the eyes of other lenders. Once a microloan is paid in full, most microborrowers are able to qualify for larger amounts of financing through traditional sources.
Time is always of the essence but especially so for small business owners in need of working capital. Waiting for a traditional loan backed by the SBA can take months, whereas a microloan may take as little as 14 days to come through. Each microlender has its own lending requirements, though, and each handles its own approvals at the local level.
The economic crisis created a huge demand for alternative financing options like microlending. With the SBA stepping up to the plate and allocating $50 million in funding for its microloan program, it’s no surprise that this financing option is now going mainstream. Whether you’re beginning your first business venture or need working capital for an existing business, microloans may be the solution you’ve been looking for.