How Microlending Can Help You Start A Business

This post has been created by a guest contributor

This is a smart way to get the funding you need for your startup!

By Tracy Williams,
Entrepreneurship Specialist – BCL of Texas 

If you want to start a business, you’ve probably thought of using your savings, asking friends and family for help, putting expenses on your credit card, and applying for a traditional bank loan. The first two options work well, provided you’ve got a little socked away and your nearest and dearest believe in your dreams as much as you do. The third could put your personal credit in serious jeopardy, not to mention racking up some crazy interest charges. The fourth, traditional bank loans, aren’t always easy to come when you’re an entrepreneur (perhaps surprisingly). That’s where microloans come into the picture.

BCL of Texas offers customized lending plan designed to strategically grow your business. BCL’s Small & Diverse Growth Fund for minority and women-owned businesses offers more flexible underwriting and collateral requirements than traditional lending programs and is designed specifically to meet your needs as a small business owner.

How Do Microloans Work?

 If you’re in the early stages of funding your business, you can borrow up to $35,000-50,000 from a small, community-based nonprofit organization called a microlender. These work with the SBA (Small Business Association), and there are about 160 of them throughout the country. Think of them as intermediaries monitored by the SBA. Of course, there are also microlenders who receive their funding from state or local governments instead of the SBA, and others who operate through philanthropies. For more information from SBA, a free 30-minute online course, How to Prepare a Loan Package, is designed to assist you with what to include when requesting a loan, the loan process as well as what lenders are looking for when making a lending decision. Even those who need just a little capital or who have a limited credit history are eligible to apply–in fact, those descriptions apply to most of those who choose microloans in the first place.

If you choose to apply for and then receive a microloan, you’re ready to take care of those startup expenses and start profiting so you can pay back the loan. Microloans typically have a short time period and a low interest rate for repayment. According to the SBA guidance procedures for the Microloan Program Sub-Chapter 3-F.19, the initial payment on a microloan should be scheduled for within 60 days of the closing of the microloan, with subsequent microborrower payments scheduled on a monthly or more frequent basis. It is at the intermediary microlender’s discretion to change the repayment schedule to ensure full repayment of the microloan, but no deferment may extend beyond 6 months. Also, no deferment may cause the life of the microloan to extend beyond 6 years. It is important to ask whichever microlender you choose about the repayment time period and interest rate. Be sure to understand clearly what is expected prior to signing any paperwork. Ask for professional advice, from small business advisors, mentors or industry experts, as to whether it will be feasible to repay the loan based on your small business’ anticipated sales volume and unique circumstances.  

How Do I Get Started?

 Start by determining what your expenses are going to be. You may want to sit down with an accountant so that they can look at your business plan and help you project costs during the initial startup period. Once you know how much money you’ll need, it’s important to ensure that your projected profits will allow you to make monthly payments on the loan. Even if you don’t want to work with an accountant, you do need to create a business plan using a template. Then you’ll need to begin searching for the microlender that’s right for you. You can find one in your local area by talking to other business owners or business groups, and you can also look through the online Resource Guide for Small Business Dallas/Fort Worth Edition for a directory of SBA lenders, scroll to page 60. Be prepared to put up collateral, like your car or home, and to invest some of your own money. For most lenders, you’ll need a decent credit score–anything under 575 probably won’t cut it—in which case you can still look to alternative solutions such as crowdfunding.

 What Should I Look for in a Microloan?

 You’ll want to make sure that the microloan you sign doesn’t require the microlender to sign off on every single business decision you make. While they deserve to understand your business plan and to be paid in a timely fashion, the way you run your business should ultimately be up to you. Of course, the interest rate should be significantly lower than you would expect from a credit card–think under 12%. You also need to weigh the risks, such as defaulting on the loan, and benefits of signing before you actually put ink to paper. If you’re not able to pay back the loan, you might very well have to file for bankruptcy to save your collateral, which will negatively impact your credit score for years. Microloans can be a fantastic option for the business savvy; just don’t bite off more than you can chew.

This post has been contributed by BCL of Texas, one of the Dallas B.R.A.I.N.’s partner organizations that is dedicated to supporting small businesses. The views and opinions of authors published on this blog do not necessarily reflect those of the Office of Economic Development, the Dallas Public Library or the City of Dallas.