Micro-Loans: Growing a Small Business Doesn’t Always Take Big Bucks

Small Business Loan Blog PhotoBy Ty Kiisel

With the notable exception of the businesses that make appearances on reality TV or high-growth high-tech companies, most small business owners aren’t looking for millions of dollars to ramp up sales, launch new products or otherwise fuel growth. In fact, many business owners are able to leverage relatively small amounts of capital into big results.

Fortunately, while many banks are stepping back from making relatively small loans of $150,000 or less to small business owners, there are lenders that have stepped in to fill the void left by those bankers retreating from loans they see as too risky or not very profitable. Depending upon the age of the business or the business’ credit profile, they may even have more than one option.

The SBA is Promoting Smaller Loans

The SBA, a U.S. government agency tasked with running the flagship national loan guarantee program, recognizes how important small loans are to the smallest small business owners, and they’re trying to make them more accessible. In an effort to encourage more of their participating lenders to make loans under $150,000, they started by removing fees on 7(a) loans in that category a couple of years ago. The 7(a) loan guarantee program is one of the most popular loan guarantee programs, and it appears the strategy is helping. Within the first six months of implementing the removal of fees, SBA-backed loans under $150,000 increased by around 15 percent.

Earlier this year, the SBA increased their efforts to court credit unions into joining the ranks of SBA lenders in higher numbers with the idea that they would be a great fit for borrowers looking for smaller loan amounts the bigger banks weren’t interested in.

In addition to what they’re doing with the 7(a) program, their micro-loan program is helping business owners looking for $50,000 or less. The SBA considers any loan of $50,000 or less to be a micro-loan. They make these micro-loans available to business owners through nonprofit community-based lenders. According to the SBA, the average loan size in this program is roughly $13,000. The program is designed for those business owners who can leverage a relatively small loan amount into a positive impact within their businesses, for their customers, and the communities they serve.

“We work with many different businesses,” said Stacey Sanchez of the San Diego-based non-profit CDC Small Business Finance, an SBA micro-lender. “Restaurants, small merchants and other businesses the average person might associate with Main Street. We help a lot of startups get off the ground as well as some businesses that might have been around for a while, but don’t need a lot of capital. Many businesses could be a fit for the micro-loan program depending upon the nature and size of the business, and where it’s located.”

SBA-affiliated lenders aren’t the only place a business owner can fund a micro-loan; there are also community non-profits and other lenders who provide loans in that under $50,000 category.

Community Non-Profit Lenders and Micro-Loans

Like the community banks of years past, many of these micro-lenders believe a business owner’s reputation is an important metric when making loan decisions.

“We look at what we do as very similar to how small business lending took place 100 years ago. Back then, a business owner’s reputation in the community was the primary way a banker would evaluate his or her creditworthiness. Although times have changed in many ways, we believe this is still a good way to determine who gets a loan and who doesn’t,” said Justin Renfro of Kiva Zip. “Your reputation within your community is what qualifies you for a Kiva Zip loan. We call it social underwriting.”

In practice, if you can get 20 to 25 people from your personal network to contribute as little as $5 each to your financing goal, the Kiva Zip community of 1.5 million lenders will do the rest. They are looking for ways to tie the financing they provide back into the communities these businesses serve—which is one reason why Kiva Zip takes this approach.

Of course, Kiva Zip isn’t the only lender looking at innovative ways to put micro-loans into the hands of small business owners. Accion, the AEO’s TiltForward initiative, and other non-profit lenders are continuing to find new ways to help serve small businesses.

Online Lenders are Making Small Loans More Accessible

A new breed of lender has also stepped up to offer small business owners loans within this category of lending. Their services are available online, and while some of these lenders do make larger loans, loans of under $250,000 are the sweet spot for many of them.

Like the loans described above, these loans are available to early-stage businesses, those with a year or two in business, along with established businesses. Loan terms vary from lender to lender and include shorter-term loans of six to 24 months as well as longer-term loans.

When small businesses are looking for capital to fuel growth or fund working capital, it’s not that they want too much, but rather too little that makes it difficult to go into the local bank and get a loan. The power of these smaller loans is that, in the right hands, they help entrepreneurs who identify opportunities where a relatively small amount of capital can make a significant difference in their businesses. There are more options available than ever before for business owners to access capital to grow their businesses, expand and hire new employees, and strengthen local communities. Fortunately, there are places to look, and growing a small business doesn’t always require big bucks.

Ty Kiisel is a contributing author at BusinessLoans.com, a new resource full of content addressing all aspects of business financing for small business owners. Ty has over 25 years of experience in the trenches of small business, and provides personal anecdotes and valuable tips to help small business owners become more financially responsible.

 

What’s the Secret to Achieving Financial Freedom?

Do you have a long-term plan for financial growth? Without a plan, you will have stress. If your plan is high risk, you will have stress. Financial growth should be built on a long-term plan. Most of those who gamble for the quick riches in the stock market or other places live with a stress that makes it hard for them to focus on their business. A plan that looks many years in the future is the way to achieve freedom from financial concern so that decisions are not impacted by current financial needs.

How to achieve financial freedom

As a business owner, is there anyone who can say that he or she is personally successful without his or her company being successful? Do you know a business owner who could have a failing business and say “I’m successful” or “I’m happy?” I would guess the answer would be no because the owner’s business is integral to the owner’s happiness.

To have freedom from financial worry, you need the ability to meet financial emergency contingencies. You must not be desperate to make deals that are high risk.

One manufacturer took a contract with a large retailer that resulted in over 50 percent of his revenue coming from the retailer. He financed a major expansion of plant and equipment to serve the retailer. When the retailer switched to another supplier, he was hurt. Why did he take the risk? He did it because he said that it was his chance at big money.

Financial freedom is the ability to buy what you want without worrying about it. This is different for everyone. To some, this means tens of millions of dollars to buy planes. To others, it means taking great trips when you want. This will be determined by what is meaningful to you.

When you look at yourself, do you see a person who is managing his or her life or a person who reacts to challenges and opportunities without a plan for getting you where you want to be? Business owners starting up are rarely debt free. They are generally going to be personally guaranteeing loans for some of their expenses. One thing I constantly hear from business owners who have been in business for 10 or more years is that they would like to eliminate or cap their financing guarantees. They are at a different time in their life.

Money

What do you think money is all about? Is it to bring you financial freedom? To change your relationships with people? Question your belief system about money. If money means the ability to have a mountain home, make it part of your plan. If it means buying a Mercedes, make that a goal.

Pick no more than five material things that are important to you, and make a goal to obtain them. There is nothing wrong with it. Whether they bring you lasting pleasure or not, they may help you to see, once you get them, what actually is important to your feeling of personal success and happiness.

Non-Monetary

If money was not a factor, imagine yourself in the future. Say you won $10 million in a lottery. How would your life change? Right away, everybody says, “I’d buy this or that,” but what about your family involvement? What about your spiritual life and your hobbies? There is no right or wrong answer but there must be honesty.

How often have you heard successful entrepreneurs and professionals say that, if only they had it to do all over again, they would take more time for themselves? Of course, it is much easier wishing you had taken the time to smell the roses during the climb to business success once you have achieved your goals — but those who are still on the road to success should take note. Get to know your passions and start planning for tomorrow.


Allen E. Fishman founded The Alternative Board (TAB), the world’s largest franchise system providing advisory board and executive coaching services to business owners, Presidents and CEOs. TAB’s worldwide business advisory network operates in over 1,000 cities in the United States, Canada, the UK, Czech Republic, New Zealand and Venezuela.

Fishman is also the author of several books in which he shares his business insights to help business owners, including two best-sellers: