With SBA microloans, businesses get
a trickle of cash and a torrent of advice
By Jennie L. Phipps • Bankrate.com

Even the smallest business can benefit from one of the Small Business Administration's newest loan programs. Under the SBA's microloan program, borrowers get the dollop of cash they need to get going -- and a wealth of advice.

In 1999, lenders participating in the microloan program doled out $15 million in loans to more than 1,300 borrowers -- all at no more than $25,000 at a time.

Under the program, SBA provides money for loans and technical assistance to nonprofit community-based lending agencies. The agencies, in turn, loan the money to qualified applicants.

Since 1992, when the program began, more than $90 million has been loaned, with an average loan amount of less than $12,000. Loan rates vary, ranging at this point from 8 to 12 percent for as long as six years.

Getting a microloan is no more complicated than persuading a nonprofit organization that you would like to have your own business and that you have a fair shot at making a go of it.

Counseling first, money later
The application process starts with a counseling meeting. At that meeting, the agency will review any business plan a potential business owner might have already written. But mostly, they just talk to the applicants to get an understanding of what they want to do and how realistic their aspirations are.

David Means, executive director of the Greater Newark Business Development Consortium and a retired banker, calls himself "a lender of last resort."

"We deal with people who can't qualify on paper for a business loan from anywhere, but that doesn't mean that they don't understand how to run a business. They do, so we give them money and all the other help we can," Means says.

But it's not easy money. Another lender, the Columbus Countywide Development Corp. in Columbus, Ohio, immediately rejected a man who wanted to open a locksmith business, recalls assistant director Brad Shimp. The reason? The man failed his locksmithing course.

Shimp also sent a potential deli owner packing when he revealed his sales figures were based on selling one hoagie every eight seconds for 12 hours a day, seven days a week. He told the woman who wanted to sell beauty supplies to "every person with skin" to read up on marketing and figure out a more specific target audience.

For those with a realistic plan, the next step is usually a technical workshop. Most development agencies require applicants to attend the session, which can last a day or more, to polish their required business plans and work on other weaknesses. Those who have obvious shortcoming in key areas -- such as no computer skills or no math skills -- are frequently detoured to the local adult education center for training.

Cash, collateral and credit
In addition to writing a business plan that passes muster and demonstrating basic business skills, applicants must come up with 10 percent of the loan amount in cash. Borrowers also must have verifiable collateral, but the range of what's acceptable is broader than you might find at a bank. Lenders will accept virtually anything a pawnbroker will.

Shimp emphasizes that collateral is important and his agency will turn down people who won't pledge anything. "We're looking for commitment," he says.

Lenders look for reasonably clean credit, but are more lenient than conventional lenders. "If the problems are clearly centered around some event in your life -- like divorce -- we won't hold you to being spanking clean. We know people have problems, but you have to be able to explain them to us," Means says.

The decision-making panel
A three-member panel of volunteer professionals -- accountants, lawyers, bankers, small business owners -- makes the final decision. Two out of three must vote yes, but if an application has gotten that far, it's unlikely to fail. Shimp concludes, "We don't even send it out unless it has a very good chance of being approved."

The whole process can take months if the agency feels the borrower needs special assistance, but if things go smoothly, it can be wrapped up in a matter of a couple of weeks.

As Means says, "We want to put people in business. That's our goal."

"I couldn't have done it without CCDC," says Tom Glaze, who got his janitorial supply operation off the ground with a microloan from Columbus. "No bank was going to give me a loan -- even one as small as $25,000." Five years later, Glaze's HTG Sales Inc. will net several times that number.

Jennie L. Phipps is a contributing editor based in Michigan
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-- Posted: Feb. 4, 2000