Microloans: A Solution for Small Business?

In recent months, many banks both large and small have continued broadening credit qualification standards for business loans, but nonetheless, owners might now be seeking new types of financing in greater numbers.

The new trend of microloans is now hitting the U.S. after proving successful over a number of decades in many other parts of the world, according to a report from the Associated Press. Already, this kind of lending is gaining a foothold among local business owners in major U.S. cities, including Miami, New York, Houston and Los Angeles.

It’s likely that this increase in interest for microloans stems from the difficulties that many small business owners have had in recent years in finding financing for their efforts at opening or expanding their operations, the report said. This is particularly true for minority business owners, as only 17 percent of these companies with revenues of less than $500,000 annually received loans, compared with slightly less than 25 percent of those for startups owned by non-minorities.

Microloans can be beneficial because of the flexibility they provide, the report said. They can range anywhere from $500 to as much as $50,000, but most max tend to fall at less than $10,000. Further, they can be paid back in a matter of months or just a few years. Typically, these loans are reserved mainly for businesses that employ only a few people at most, and credit standards are typically far less stringent than those issued by larger lenders.

“The banks wanted us to show our business had been running for at least two years before we could get a loan,” small business owner John Giraldo, whose company has been selling smartphone cases wholesale since 2008, told the news agency. “We couldn’t do that, and with my credit shot, we had no chance.”

Data shows that as many as 20 million “microenterprise” small businesses exist nationwide, but that there are probably only about 17,000 microloans issued annually, the report said. But a 2008 study found that those companies who do receive this type of financing might see their income rise by an average of 20 percent.

Access to credit has long been considered to be of major importance to small businesses, and studies have shown that even having a credit card for a company can significantly increase flexibility and hiring capabilities.

Image: mjtmail, via Flickr