The smallest businesses in America are constantly overlooked or put on the back burner when it comes to receiving capital from big banks and lenders. According to Phyllis Furman, over at NY Daily News, the primary reason being that too many big banks feels as though they won’t profit much from providing small loans to the smallest businesses. Furthermore, it costs a bank the same amount of time and money to underwrite a small loan (e.g. $100,000 or less) as it does to write a larger one (e.g. $1 million or more). Small business loans tend to be just as expensive as larger business loans, but nowhere near as profitable.
The Solution for the Smallest Businesses – Go Where You’re Wanted
The solution for the smallest businesses (that need $100,000 or less) to get funding, is to go where they are wanted. This means approaching the types of funding sources that are solely dedicated to providing small loans (under $100,000). These funding sources are typically microlenders. The SBA (Small Business Administration) provides funds to local non-profit, community based organizations who administer microloans (up to $50,000) to the smallest businesses in their area. These non-profits are required to have experience in lending, management, and technical assistance.
Funding Uses, Terms, and Interest Rates
According to the SBA, microloans for the smallest business in American can be used for a variety of different business purposes including:
- Equipment and Machinery
- Inventory and Supplies
- Furniture and Fixtures
- Startup and Working Capital
Microloans cannot be used to pay off existing debt or purchase real estate. The loan repayment terms vary depending on each unique business. The maximum repayment term is 6 years and average interest rates are typically 8% to 13%. Here are a few factors that dictate the repayment terms for a business:
- The needs of the small business owner(s)
- Lender requirements
- Planned use of funds
- Funding amount
How to Find a Microlender in Your Area
The SBA has made it really easy to find microlenders in your area. They provide a list of SBA approved microloan intermediaries on their website here. Before you apply, you’ll most likely need to have a business plan. In addition to having a business plan, some microlenders may require you to take business development training, according to the SBA. Therefore it’s important to understand that obtaining a microloan may not be a speedy process. Be prepared to dedicate at least 3 full months to the process. It may not be a simple and quick process, but it may be your only chance at obtaining funding in a country where the smallest businesses continue to be overlooked by big banks.