Microlenders Widen Their Client Base

By ANJALI CORDEIRO

No loan is too small for small businesses these days.

With many banks continuing to put a hold on lending, more small-business owners and would-be entrepreneurs are turning to microlenders, organizations that dole out smaller loans typically ranging from as little as $500 to $35,000.

Microlenders, most of whom are nonprofits, have traditionally focused on helping small-business owners, particularly minorities and women, in lower-income communities as well as entrepreneurs in developing countries who need a few dollars to buy, say, a sewing machine. They tend to charge higher interest rates than banks because their borrowers are often first-time entrepreneurs or have weaker credit profiles.

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Microloans

When you need only a little cash to grow, it's time to check into microloans. The Microloan Program was developed by the SBA in 1992 to increase the availability of very small loans to small-business borrowers. It achieved permanent status in 1997. The program uses nonprofit intermediaries to make loans to new and existing borrowers, and since 1992 has accounted for more than 12,500 loans totaling more than $112 million.

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Micro-loans for Americans?

SAN FRANCISCO (Fortune) -- When the economic downturn took hold last autumn, the management team at non-profit Kiva.org made a calculated bet to curb investment, anticipating that donors would slow the volume of small loans they make to entrepreneurs in the developing world. That slowdown never came. Now, the non-profit site is racing to keep up with user demand even while planning to bring its unique form of charity to the U.S.

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Follow Up on the Stimulus and SBA

I wanted to follow up with our friends at SBA on which items, specifically, we should be aware of that are relevant to small business owners in terms of translating the stimulus package to action.

John Banks, Lead Business Development Specialist in the Philadelphia District Office, was kind enough to spend some time creating an informative email to me, outlining exactly what the American Recovery Reinvestment Act has in store to stimulate lending. John has given me permission to copy his email thoughts to this Blog. You will find them below.

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State, County, and Local Small Business Loan Financing

There are a variety of financing programs available to help your business grow. While the Small Business Administration (SBA) is the main resource for small business owners, it is not the only one. Each state has a Small Business Development Center (SBDC) to provide management assistance to current and prospective small business owners. If you are looking to start or expand a small business, contact your local SBDC to see if they can help you. In addition, be sure to read up on Minority Business Loan Programs.

SBDCs offer one-stop assistance to individuals and small businesses by providing a wide variety of information and guidance in central and easily accessible branch locations. The program is a cooperative effort of the private sector; the educational community; and federal, state, and local governments. Here are some of the loan programs your SBDC may offer:

504 loans are offered directly through approved local economic development agencies. The financing agency is limited to 40 percent of the project but not to exceed $1 million.

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Stimulus Package Targets Small Business Loans

It looks like the SBA loan programs so heavily weighed down from applied fees are getting help. SBA loans are desperately needed by businesses in the Jacksonville area to stay afloat and reshape their business model for the coming recovery. Many local banks are not making SBA loans as they have had trouble selling them to investors on the secondary market. The economic stimulus package as proposed would begin the process of making the loans attractive again.

It appears most of the curent SBA programs for lending are addressed. There is something here for everyone as the 7a program is for working capital, while the SBA 504 is designed for fixed asset purchases like building and equipment.

We are hoping that the package also straightens out the SBA Community Express program which was a pilot program that worked very well here in North Florida. We do not see SBA Microloan activity in North Florida and it is hoped that the stimulus program makes thes small loans more accessable.

From the U.S. Senate Committee on Small Business & Entrepreneurship:

United States Senator Mary Landrieu, D-La., Chair of the Senate Committee on Small Business and Entrepreneurship, commented on the small business assistance provisions of the American Recovery and Reinvestment Act that was marked up by the Appropriations Committee today.

"The economic stimulus package includes essential provisions that will help jumpstart lending for small businesses nationwide," Sen. Landrieu said. "By reducing fees on government-backed small business loans, the bill will make new loans more affordable so small businesses can grow and succeed, creating jobs and strengthening the economy."

The stimulus bill includes $515 million to temporarily eliminate fees associated with 7(a) loans, the most common type of SBA-backed loan. Reducing lender fees will help reverse the downward trend in 7(a) lending, stimulating as much as $15 billion in small business loans. Last fiscal year, 7(a) loans decreased by more than $1.6 billion, or more than 30,000 loans. This fiscal year, 7(a) lending is already down by more than 56 percent.

The package also appropriates $100 million for the temporary waiver of fees on 504 loans, which provide long-term financing to small businesses that are expanding and need to buy equipment, facilities or other fixed assets. 504 loans are down 42 percent this fiscal year compared to this time last year. This funding is estimated to stimulate as much as $5 billion in small business loans.

The bill includes funding for the SBA's Microloan Program, which provides very small loans to qualifying small businesses. It includes $6 million for the program to handle the increase in demand from micro-businesses that have been crowded out of other financing sources as a result of the credit crisis. This funding will leverage an additional $51 million in microloans, creating or retaining an estimated 10,000 jobs. The bill also provides $24 million for complementary counseling.

To provide accountability, the package contains $10 million for the SBA Inspector General's oversight of SBA stimulus funds and $15 million for increased lender oversight.

"The small business provisions in the stimulus package are certainly steps in the right direction, but there is still much work left to be done," Sen. Landrieu said. "I am looking forward to the Small Business Committee roundtable on Thursday where we will focus on what is necessary to further stimulate growth and job creation among the nation's small businesses, the engines of our economy."

Source: http://unfsbdc.blogspot.com/2009/01/stimulus-package-targets-small-business.html

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Micro-loans can help local entrepreneurs

From my old home town paper, The Bergen Record, Douglass Crouse highlights a micro-loan program where very small startups are created and provided some intensive care instruction. Many businesses that are well known in Jacksonville like Peterbrooke and Firehouse Subs, started with a very small investment.

In a time of economic hardship and rising unemployment. Many people are searching for income. Some of these budding entrepreneurs should be given a hand up with a small loan and proper exposure to best business practices. Given the support Wall Street is getting, creating a new business and a job for $500 seems like a bargain.

PATERSON, NJ— For some Silk City entrepreneurs, $500 is enough to get a business rolling or keep it on track.

Jamie Dykes made that discovery while doing research for the Paterson Restoration Corp.'s recently launched micro-loan program, which lets resident business owners borrow amounts from $500 to $10,000.

In starting a business, attorney fees alone often exceed $500. Even mustering enough cash for cleaning supplies can prove a challenge for some, said Dykes, the PRC chairman and president of the Greater Paterson Chamber of Commerce.

"We're looking at a segment of the market that may be very challenged as far as credit history," he said. "They may have no collateral, in the classic sense of the word."

Since the program debuted in October, four entrepreneurs have been awarded loans of $10,000 each, with businesses including a cleaning service and a music production company.

Planning for the micro-loan initiative took two years, with $300,000 in seed money raised through a 30-year-old loan program also administered by the PRC.

Micro-loan applicants must pay a $25 processing fee and take basic business coursework through the William Paterson University Small Business Development Center in Paterson.

"The typical person who comes in here is not experienced in preparing a business plan, but we're encouraged by the progress they make," said Robert Hille, assistant regional director.

Jason Martin said that support was key in his launch of Jus Pray Production, which offers photography and videography services. "Clients have made comments about how well put together the business is," he said.

If applicants are deemed a worthy risk by the PRC's underwriter, approved by its board and given the go-ahead by a staff attorney, they receive loans with an interest rate set at two points above prime. On their own, some owners might be looking at a rate in the upper teens, Dykes said.

"The standards are more lax than a bank's, but the process is similar," Dykes said. "That way the owners have a feel for how things work if they decide to go for more capital down the road."

Source URL: http://unfsbdc.blogspot.com/2009/02/micro-loans-can-help-local.html

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Sources of Financing

The Small Business Administration reports that: “While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second”.

Obtaining the correct amount of financing is essential to the success of any business. However, no amount of money will be sufficient for your business needs, unless you have the knowledge and planning in place to be able to manage that money effectively. Being prepared will help you avoid common mistakes such as securing the wrong type of financing, or underestimating the amount of money you will need.

Most people think of commercial banks when they realize a need for business financing. Unfortunately, as a source of start-up funding, banks are an unlikely source. Instead, most small businesses are financed through private funding or personal savings.

"But can't I help fund my small business with grants?" This is a question that we hear often at The Maine SBDC. With rare exception, the answer is no. Not only is grant money scarce, few businesses even qualify to receive grants due to tedious qualification requirements. There are many considerations that you must explore before securing financing for your business. The Maine SBDC is here to help.

Financing FAQs

What do I need to borrow money for my business?

A: Your bank is not a charitable institution. It is in business to make (not lose) money. Consequently when a bank lends money it wants to ensure that it will get paid back. To maximize the possibility of being paid back, the bank wants to make sure that there is sufficient assurance that a person can pay back a loan and that she has met such obligations before. The bank will consider the 5”C”s of Credit before it makes a loan.

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships--personal and commercial--is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral or "guarantees" are additional forms of security you can provide the lender. If for some reason, the business cannot repay its bank loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable and in some cases inventory are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that--someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees also will be taken into consideration

What is a Credit Score?

A: According to Lee Ann Obringer at HowStuffWorks, a credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It's the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980's to come up with the scoring method. The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system. Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you've been at the same job.

What is a Credit Report?

A: According to Lee Ann Obringer at HowStuffWorks, a credit report is an accumulation of information about how you pay your bills and repay loans, how much credit you have available, what your monthly debts are, and other types of information that can help a potential lender decide whether you are a good credit risk or a bad credit risk.

The report itself does not say whether you are a good or bad credit risk -- it provides lenders with the data to make the decision themselves. Credit bureaus, also known as credit reporting agencies (CRAs), collect this information from merchants, lenders, landlords, etc., and then sell the report to businesses so they can evaluate your application for credit. Lenders make their decisions based on different criteria, so having all of the information helps them ensure that they are making the right decision.

What kind of Information is in my Credit Report?

A: According to Lee Ann Obringer at HowStuffWorks, information that makes up your credit report includes:

• Personal identifying information - This includes your name, address (current and previous), social security number, telephone number, birth date, your current and previous employers, and (on the version you get) your spouse's name may be included as well.

• Credit history - This section includes your bill-paying history with banks, retail stores, finance companies, mortgage companies, and others who have granted you credit. It includes information about each account your have, such as when it was opened, what type of account it is, how much credit it includes (or the amount of the loan), what your monthly payment is, etc. If you've closed the account or the loan has been paid off, then that information shows up as well. If there were missed or late payments, this is where that appears.

• Public records - Information that might indicate your credit worthiness, such as tax liens, court judgements and bankruptcies. This information is readily available from public records.

• Report inquiries - This section includes all credit granters who have received a copy of your credit report. It also includes any others who were authorized to view it. In addition, lists of companies that have received your name and address in order to offer you credit are included. These companies don't actually see your report, but get your name if you meet their criteria for an offer of credit, insurance or other product. This is where all of those "pre-approved" credit card offers come from.

• Dispute statements - The report may also include any statements you've made disputing information on the report. Most credit bureaus allow both the consumer and the creditor to make statements to report what happened if there is a dispute about something on the report. Things that don't appear on most credit reports include bank account balances, race, religion, health (although medical bills may show up as debts), criminal records, income, and driving records.

How can I get a copy of my credit report?

A: See Annual Credit Report

Order a 3-bureau report which includes your complete information from all 3 national credit bureaus – Equifax, Experian, & TransUnion. A single-bureau report contains your information on file at one of those 3 bureaus. Although many national lending institutions report consumer credit information to all three, smaller banks and other credit grantors may report to only one-or even none. Therefore, your credit report from one credit bureau is not necessarily exactly the same as your credit report from another. You can obtain a 3-burearu report by contacting any of the three major bureaus:

• Equifax – To order your report, call: 800-685-1111

or write:

P.O. Box 740241, Atlanta, GA 30374-0241

• Experian – To order your report, call: 888-EXPERIAN (397-3742) or write: P.O. Box 2104, Allen, TX 75013

• TransUnion – To order your report, call: 800-916-8800 or write: P.O. Box 1000, Chester, PA 19022

How can I improve my credit and manage my debt?

A: You may want to consider the services of a credit counselor. Many credit counseling organizations are nonprofit and work with you to solve your financial problems. But beware — just because an organization says it is "nonprofit" doesn't guarantee that its services are free or affordable. Reputable credit counseling organizations advise you on managing your money and debts, help you develop a budget, and usually offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. Some questions to ask to help you find the best counselor for you can be found in the Federal Trade Commission’s Facts for Consumers on Fiscal Fitness.

What is a microloan?

A: Microloans are loans made to small and home-based businesses which are unable to obtain loans through regular channels (banks and investors). Microloans generally range from a few hundred dollars to $40,000, and often are funded in part by the SBA. Economic Development Corporations and Community Development Corporations make most of Maine’s Microloans; your Maine SBDC counselor can help you find a microloan lender.

What are Revolving Loan Funds?

A: A Revolving Loan Fund (RLF) Loan Program is a local economic development program designed to assist area businesses by providing "gap" financing for new business start-up, expansion or retention projects. Gap financing is typically subordinated financing that can be thought of in terms of the "short fall" in equity portion of total project funding required. Through an RLF Loan Program, regional economic development corporations work directly with a local business, its bank lender and community/economic development organization to design a financing package that meets the RLF program guidelines and needs of the business. Many RLF programs in Maine are funded in part by FAME.

How can I get a grant to start or expand my business?

A: Unless your business involves the development of new technology or is a non-profit organization, 99.9% of the time you will be wasting your time looking for a grant.

Will the Maine SBDC lend me money?

A: The Maine SBDC does not have any money to loan but your Maine SBDC Business Counselor will suggest appropriate sources for financing based on your business needs and personal situation.

Source: http://www.mainesbdc.org/resource_cat_detail.cfm?category=Financing&topic=7&lookup=fin