Microloans Offer a Way to Get Small Businesses Off The Ground

By David Kiger

The dream of owning a small business can come with a hefty price tag. Where that money comes from is one of the first key challenges of entrepreneurship.

One avenue that could be an answer is microloans. The microlending concept is generally regarded to have taken flight with Muhammad Yunus and Grameen Bank, and it has been lauded as a way to fight poverty in addition to encouraging small businesses. Microloans are relatively small in comparison to what banks provide.

In a story for the U.S. Small Business Administration, Caron Beesley reports that the average cost of a new business is around $30,000 — depending on the industry, business model and other factors — as estimated by the Kauffmann Foundation.

“If you determine that your start-up venture is going to cost you somewhere between $500 and $50,000, and your savings just aren’t enough, you might want to consider a microloan,” she writes. “Why? Many start-ups and new small businesses often find they may not qualify for a traditional small business bank loan. Without a proven track record of 3-5 years under your belt and/or established business credit, many banks simply won’t take the risk.”

The SBA can assist in microloans, as can “community-based, nonprofit microfinance institutions,” Beesley writes. Some microloans can be targeted to people with poor credit, she says, and some are designed for women and veterans.

Here’s a look at how microloans work on the road to starting a small business.

Step by step

How to get started with microloans? A story by financial institution Fundera lays out a four-step plan to prepare for the process.

Collateral: The lender may require collateral or a personal guarantee for microloans, because the funds are “routinely serviced to businesses with little credit history, and to business owners with no credit or poor credit.”

Credit report: Good credit is always a significant help with loans, and those interested in microloans should get their credit reports in shape. But the Fundera story notes that the emphasis on credit is greater in other kinds of loans than with microloans. “Because of the smaller principal amount, microloans are seen as a great ‘starter’ loan for brand new businesses with no credit history, or even for businesses bouncing back from bankruptcy.”

Business plan: Prospective business owners will need to prepare a detailed and well-thought-out business plan for a microloan, just as they would for a bank loan. “Microfinance lenders will look to your business plan to determine the strength of your business model, decide whether you are serious about growing your business, and ultimately decide whether you qualify for a microloan,” the Fundera story states.

Personal investment: If an entrepreneur is willing to put some of his or her own money into the business, that could increase the chances of a microloan, according to Fundera. “ … Lenders want to see your earnest effort and intention to invest your own time, effort, and money into your business venture. … When you apply for microloans, certain intermediary lenders may request your recent income tax returns, then Go to the full article.

Source:: Business 2 Community

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