Are Micro Loans Right for Your Small Business?

Micro loans are a good option for small businesses that can't get traditional funding.

Many startups and small enterprises with less than 10 employees and under $500,000 in annual revenue are likely to encounter difficulty in obtaining loans from big banks. Increasingly, business owners are turning to micro lenders, who are community-based non-profit organizations that make loans to companies that are unable to obtain financing from traditional lenders.

Typically, micro lenders receive money from the Small Business Administration, local governments or grants from philanthropic organizations. They then turn around and make loans to companies who have exhausted their lines of credit, maxed out their credit cards or encountered some type of obstacle that blocks them from getting funding from traditional sources.

Micro loans work in a slightly differently fashion than a tradition loan from a bank. Amounts are frequently in the $10,000 to $50,000 range, but can range from $5,000 all the way up to $100,000. Micro loans can not be used to pay existing debts or to purchase property. They can be used for working capital, purchasing machinery, furniture or inventory. Also, micro loans usually have a higher interest rate than a traditional loan. Rates generally are between 8 and 13 percent, and the maximum length of a micro loan is six years. But like a traditional bank loan, micro lenders require a form of collateral, as well as the personal guarantee of the business owner.

One of the best known micro lender organizations is ACCION, which since 1991 has provided over $119 million in funding to help grow small businesses. ACCION frequently makes loans to women-owned and minority-owned businesses in empowerment zones. The organization often advises the entrepreneurs on how to better manage their finances.

Another popular micro lender is the Business Center for New Americans (BCNA), which is located in New York and provides financial services to immigrants, women and other groups. On the West Coast, the Opportunity Fund is a good micro lender for California-based smaller businesses.

 

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