Until recently, there were very few options for borrowing small amounts of money (under $10,000) to start or expand a home business. Banks usually don’t make loans to home businesses. And venture capitalists won’t even talk about such small amounts. The best hope has been to take out a home-equity loan, run credit-card balances to the max, or borrow from a friend. But there is good news. More and more private, nonprofit, community-based institutions are being formed, and they are giving more and more microloans–from $250 to $25,000. Over 200 microloan organizations use private or public sources from a revolving loan fund to make short-term loans to low-and moderate-income individuals who want to start or expand a business. A high percentage of the loans are made to people who run home-based businesses. The purpose of the loans is clear: to promote self-employment and business development for people and areas that were hard hit by the recent recession.
THE ORIGINS OF MICROLOANS
Interestingly, for some time the U.S. government has been giving $75 million a year to fund such microloan programs in other parts of the world through its AID program. Over the past five years, however, microloan programs have popped up in the United States and many more are on the drawing board. A 1991 study by the Association of Enterprise Opportunity (AEO), an organization of microenterprise agencies, found 22 microloan programs in California alone, with another 17 in the process of starting up. According to Robert Friedman, one of the founders of AEO, microloan programs in the United States have at least three different origins. Some, like the 10-year-old Women Venture program in St.
Paul, are indigenous home-grown programs. Others have been inspired by programs in Great Britain and France, where more than a million unemployed and welfare recipients were bootstrapped into self-employment during the 1980s. The Third World, specifically Asia and Latin America, where such programs are widespread and commonplace, served as an additional model for some of the early programs, such as Working Capital/ICCD (see listing) in New England and MICRO in Arizona.
While conventional loans are awarded primarily on collateral, credit history, equity, or previous business success, microloans are based primarily on a belief in the borrowers’ integrity and the soundness of theft business ideas. Each lending program has a different focus within its given region. Some provide loans only to existing businesses. Others serve only one population– such as women, low-income groups, or welfare recipients.
Some programs give loans directly to individuals while others make peer-group loans. In peer-group lending, several people band together to obtain financing. Some programs grant a loan to all of its members simultaneously. Others require that groups decide who among them will get the first loan, then after a certain number of payments are made on that transaction, the next person can obtain a loan, and so on down the line.
Working Capital, for example, which serves rural areas in New England and is considered by many to be the “mother” of U.S. microenterprise, lends only to existing businesses. Its philosophy is to make the program open to anyone who can talk her way into a borrowing group. Many of their borrowers operate part-time businesses.
The North Carolina Rural Economic Development Center is another model program. It sets no income restrictions on its borrowers, and while most borrowers want to start businesses, some have been in business three or four years and need money to grow.
The Rural Enterprise Assistance Project (REAP) makes loans to stimulate economic development in tiny Nebraska towns that have been written off as too small to matter. A given town forms a small-business association that raises from $1,500 to $2,500 in local funds. These local funds are matched three-to-one by REAP. The association then loans the funds to local citizens to start businesses.
For MICRO of Tucson, Arizona, the largest of all microloan programs with 900 to date (averaging $1,700), job creation is paramount. This program recently topped the $1 million mark. States are also getting involved in developing microloan programs. Montana, along with other predominantly rural states, has launched the statewide Microbusiness Finance Program, allocating $3.25 million for microloans, training, and technical assistance to new and existing businesses.
THE SBA MICROLOAN PROGRAM
In June 1992 the Small Business Administration (SBA) launched a five-year demonstration project providing $75 mil- lion in funds to 47 existing nonprofit microloan programs that have been in business for at least a year. The goal of the SBA program is to encourage economic self-determination by pro- viding loans to budding entrepreneurs who otherwise would not have access to them.
“Home-based businesses are the most likely to benefit from this type of loan,” says Mike Stamler of the SBA public affairs office. These initial demonstration programs may pave the way for a time when virtually any dependable individual with a solid business plan will be able to obtain seed money to launch a home business.
Loans range from $250 to $50,000, with the average being around $7,000. In many cases, the lending institution will give a series of small loans, starting at $500 and increasing with each successful payback. The amount of time allowed for payback ranges from three months to six years; interest rates range from 5 to 16 percent.
Most programs offer technical assistance in the form of individual counseling, courses, and seminars. Others provide referrals for such services to other community agencies. Seven programs require or recommend completion of a training program before a loan is given. One agency provides educational grants for applicants.
The kinds of businesses funded range from the unusual– raising exotic birds, crafting dogsleds, and making incense–to the more familiar-computer training, tax services, and desktop publishing. In our survey, desktop publishing was the most popular type of home business that received a loan, followed by day care, catering, and clothing design.
The loans have been used for inventory, supplies, equipment, renovation, and working capital. Of the 70 different kinds of home businesses that have received loans, more than a third borrowed money to purchase a computer or other office equipment, according to our telephone polling.
THE FUTURE OF MICROLOANS
The SBA plans to expand its microloan program to 110 lenders this year. SBA’s Stamler sees a bright future for the program because “it fits in well with President Clinton’s plans for economic development.” AEO’s Friedman agrees, pointing out that both Congress and the Clinton administration have demonstrated a high level of commitment to the concept of microloan programs, and President Clinton’s campaign platform called for launching 1,000 such programs. “The SBA program is a tremendous affirmation of this field,” says Friedman. “It’s grown much faster than even the most ardent proponents would have predicted. Ultimately, there will be many other programs, serving millions of borrowers, and that will still serve only a small percentage of the need.”
So if you need but have not been able to get a small loan from traditional lending sources to start or expand your business and believe you can demonstrate the ability to pay it back, review HOME OFFICE COMPUTING’s Microloan Directory and find out if there is a program in your locale. Since microloan lenders receive funds from local private sources to spur economic development in the community, only approach lenders near you.
If one isn’t available in your area, contact a small-business development center in your community, an excellent source of information about the growing pool of microloan funds available in an otherwise harsh lending climate.
The following list of microloan institutions includes all 47 that have received loan funds from the U.S. Small Business Administration (SBA), plus MICRO, Working Capital, and The North Carolina Rural Economic Development Center, the first two being the most established microloan institutions in the country. All 50 programs loan to home-based businesses. Thirty-one provide loans to individuals; three provide loans only to groups of individuals; 14 provide both individual and group loans. Two provide no direct loans but, rather, work through local banks.
The SBA mandates that loans be made available to anyone within the specified lending area without a means test. Nonetheless, because almost all of the lenders have other sources of funds besides the SBA, many do target particular populations, such as women or minorities. In some cases, the lending institution involved offers both microloans and larger, more traditional commercial loans.
The interest rates can range anywhere from 5 to 16 percent, and many vary according to the market rate at the time. The maximum payback period allowed by the SBA is six years.