Bad credit can result in a denial of most, if not all, traditional bank business loans.
Microloan organizations provide funding to start-up entrepreneurs, home-based businesses, existing and growing small business owners.
Small business owners seeking bad credit business loans may find a microloan meets their needs because you may qualify with less-than-perfect credit, little to no assets and even limited business experience.
Business owners with bad credit or no credit history may qualify for a “credit builder” loan which allows you to get a small, short-term loan from a microlender which will help you establish and build credit.
Who can apply
Start-up businesses, newly established businesses, home-based businesses and growing businesses. During this credit crunch it has become increasingly difficult to get approved for even the smallest business loan. A mircroloan may be the answer to your short term financing needs.
How much is available
The maximum loan amount is usually $35,000 with the average loan being $13,000. You can borrow as little as $1,000. The borrower may use the proceeds for working capital and acquisition of materials, inventory, supplies, furniture, fixtures, machinery and equipment.
Loans cannot be made to acquire land or property. Microloans are not a one-time deal. Most microloan programs allow you to come back and borrow larger amounts once the first loan amount is paid on time.
Who provides the loans
Hundreds of microloan programs exist throughout the United States. Nonprofit agencies, private foundations and the Small Business Administration (SBA) operate microloan programs.
The SBA does not grant microloans directly, they provide low-cost loans and grants to non-profit intermediaries such as nationwide microloan centers which redistribute the funds to qualified small businesses.
Microlenders are typically small community-based nonprofits. The SBA uses about 160 microlenders around the country as intermediaries to provide SBA loans to small businesses.
The Obama Administration’s Recovery Act of 2009 gave an additional $50 million to microlenders, increasing their annual operating budget from approximately $25 million. Some microlenders receive their funds from state or local government and even philanthropic organizations.
General lending guidelines are established by the intermediary agency and all credit decisions are made on the local level. Business owners will likely be required to submit a business plan. If you do not have a business plan most intermediaries offer business planning courses and other training. There are also templates that can assist you in preparing a business plan at SBA template.
Terms, interest rates, and fees
The maximum term allowed for a microloan is six years. However, loan terms vary according to the size of the loan, the planned use of funds, the requirements of the intermediary lender, and the needs of the small business borrower. Interest rate on microloans can be lower than traditional small business financing and often much lower than bank credit card rates.
Credit and Collateral
The community based intermediary establishes its own lending and credit requirements. Some intermediaries may require collateral but not likely. The business owner will be required to personally guarantee repayment of the loan. A credit report is pulled on the small business owner but it is not the only criteria considered.
Bad credit business owners are often approved with a solid business plan and business training. Although it is completely up to the Microloan organization to establish underwriting criteria, they are accustomed to dealing with start-up businesses who have little collateral and less than perfect credit.
Training and assistance
The intermediary is required to provide small business training and technical assistance to the borrower if needed. Small business owners may be required to complete a series of training or a business planning course as a precondition before the loan application is approved.
Where to apply
Small business owners should apply for a microloan in their community, city or county. Visit the SBA to find a list of microlender intermediaries around the country. While microloans are a good source of funds for small businesses unable to borrow from traditional banks, it can be cumbersome to obtain a microloan if training and business planning courses are required.
Another problem with microloans is that intermediaries distribute the loans in their own communities and if you do not live in an area of an intermediary then a microloan may not be available to you. If this is the case you can research your State and local government agencies for alternative sources as some offer loans similar to the microloan program.
A great alternative to the SBA Microloan Intermediaries is a nationwide microlender called Accion USA. Accion USA specializes in working with small business owners who may not meet traditional bank loan qualifications. Accion USA can actually help you build a positive credit history as they report loan payments to the major credit bureaus. Loan amounts vary with up to $50,000 for an establish business (at least 6 months) and up to $30,000 for a start-up business.
Similar to Accion is Kiva. Kiva is an international nonprofit microlender known for providing loans in Third World countries. But now Kiva is venturing into new territory by granting loans to small business owners who are unable to qualify for traditional bank business loans. In 2011, Kiva began funding small businesses in Detriot, New Orleans and now in Los Angeles. Contact Kiva and see if they are granting microloans in your area.