Micro-Loans Can Help Struggling Small Businesses
What are micro-loans?
Micro-loans are small, short-term loans made to people who do not have access to more mainstream lenders, like banks. Making and servicing a loan involve administrative costs for lenders, therefore they will often refuse to make loans that are too small, to people that lack collateral, or to people that do meet their risk standards.
Micro-loans were originally designed to help the very poor in developing countries get access to enough funds to build a business, but the concept also filled a lending gap in the developed world and today most countries have one or more micro-lending institutions. Although there are many different types of micro-loans, most micro-lenders are non-profit organizations that emphasize helping the poor.
Micro-loans in the United States
Although the concept first gained traction in the developing the world, it was soon realized that micro-loans could also help small businesses without access to bank loans in the United States. The first major micro-lender in the United States was ACCION USA, which is still the country’s largest micro-lender and has loaned about $210 million to more than 20,000 small entrepreneurs.
ACCION USA is a non-profit organization that offers very small loans to small American businesses that do not qualify for traditional loans. The average ACCION USA loan amount is $5,300 and the loss rate is very low compared to traditional loans. Because micro-lenders are typically non-profit organizations, most micro-loans have very reasonable interest rates, as well.
Mico-loans are generally targeted to very small businesses run by one or two people, such as independent child-care workers, caterers, small restaurants and food businesses, and small specialty shops. Independent contractors – like construction workers or craftsmen – are also frequent recipients of micro-loans. Micro-loans are also popular short-term bridge loans for slightly larger businesses, to help with immediate cash flow issues.
Many micro-lenders focus on lending to entrepreneurs in immigrant communities who cannot qualify for mainstream loans. Small businesses in poor or depressed areas also tend to receive more micro-loan attention than those coming from affluent areas.
Can you qualify for a micro-loan?
There are currently more than 250 micro-lenders operating in the United States, each with its own focus and minimum loan-qualification requirements. Small business loans from ACCION USA require the applicant to have a credit score of at least 575, not to have filed for bankruptcy in the previous twelve months, to be current on all bills and expenses (especially rent or mortgage payments), and to have less than $3,000 in outstanding debt. Small businesses must also be operational, have all licenses and permits necessary to conduct business, and have a regular cash flow sufficient to make monthly loan payments. Other micro-lenders have other standards, some of which are considerably less stringent than those of ACCION USA.
Micro-loans and the current economy
Not surprisingly, the recession and credit crunch have seen a large increase in applications for micro-loans. Although the default rate on micro-loans has increased some, it has not come near the levels seen in most other lending sectors. Most non-profit micro-lenders receive a significant portion of their operating capital from the government (via the Small Business Administration and a separate fund administered by the Treasury Department), so they have remained active lenders throughout the crisis. While larger loans – those of $10,000 or more – have become less common, small loans of between $3,000 and $8,000 have become easier to obtain. The loans are small, but they are often more than enough to solve temporary cash flow problems or to launch small business start-ups.