Micro loans help small businesses

The idea of micro lending, sometimes called micro-finance, is more typically associated with loans in amounts as little as $25, disbursed to impoverished people in developing countries, ideally helping them to generate their own income to climb out of poverty.

But more recently, microcredit has become a mainstream practice in the U.S., and even though the average Small Business Administration (SBA) microloan size is $13,000, the SBA's program shares a similar mission as traditional microloan programs.

While the microloan program is open to all entrepreneurs, the program especially supports underserved markets. This includes borrowers with little or no credit history, low-income borrowers, and women and minority entrepreneurs who generally don't qualify for conventional loans or larger SBA guaranteed loans, said Pravina Raghavan, director of the SBA's New York District Office

Most banks, large or small, do not bother granting business loans of less than $50,000 because there’s not enough profit to balance the risk. By contrast, microfinance programs in the United States typically lend $35,000 or less to small businesses with five or fewer employees. They charge more than traditional banks, of course, with interest rates ranging from 5 to 18 percent.

When President Obama signed the American Recovery and Reinvestment Act into law in February 2009 to create jobs and promote spending, the law included $56.1 million for microloans for small businesses, to be doled out through the SBA through September.

Targeted toward start-up, newly-established, or growing small businesses, the microloans are short-term loans up to $35,000 each for working capital or inventory and equipment purchases. The intermediary lenders who distribute the loans can choose to lend more than that limit.

SBA microloans are disbursed through specially-designated non-profit intermediary lenders across the country that pays the SBA interest of about 1%. A list of the intermediary lenders can be found on the SBA website,

The intermediaries themselves can pool funds together to lend as much as $50,000, and interest rates for the small-business borrowers, which are usually no more than 10%, are individually negotiated with the intermediary lenders.

Unlike mainstream banks, which focus on an applicant’s credit score, the programs consider passion and commitment to the business. Most require that loan recipients take workshops on money management, marketing and business plans, and some have income caps.

Nationwide, since the Recovery Act was signed, the average total dollar amount of microloans made each month has grown to $3.1 million, up from $2.5 million in 2008. SBA intermediaries made 2,717 loans in 2009. In the New York City area alone, the SBA's lending volume increased by 70% in a year.

Small-business owners looking to borrow money should research the 20 intermediaries as each has different policies.

Only about 1% of small businesses are helped by these loans, and a separate survey showed small-business owners consistently place financing issues near the bottom of their most pressing concerns, according to a Congressional Research Service in 2010,

Just 5% of small-business owners said obtaining loans was a critical problem, according to a National Federation of Independent Business survey in early 2008 of 3,530 small-business owners.