Small Businesses Turn to Microloans

NEW YORK (TheStreet) — The Small Business Administration needs to work harder to assess risk among its lenders, says a new report from the Government Accountability Office. This doesn't bode well for borrowers whose credit is anything less than perfect. Luckily for entrepreneurs, nonprofit microlenders are eager to help.

Only a fraction of cash-strapped entrepreneurs who could benefit from a microloan apply for one. Less than 1% of small-business owners in the U.S. have received microloans to date, according to an April article in the Journal of Corporation Law. It's not that microloans haven't received any publicity. In fact, the United Nations named 2005 the Year of Microcredit, with celebrities like Michael Douglas and Aishwarya Rai filming public service announcements to encourage donations to entrepreneurs in third-world countries.

But in the United States, "the people who should know that microfinance is an option for them don't know," says Laura Kozien, communications director at Accion USA, a nonprofit microlender in New York. "Most business owners who are familiar with microfinance think I'm not poor, I'm not an immigrant, so microfinancing isn't for me."

Groups like Accion might become a key source of funding as the SBA curtails lending. The number of 7(a) and CDC/504 loans issued by the Small Business Administration fell 35% from 78,317 in fiscal 2008 to 50,829 in 2009. The total dollar value of the SBA's loans dropped 28% to $13.1 billion.

Microloans are a smart, viable option for any cash-strapped business of five employees or fewer, Kozien says. On that note, here are five things you need to know if you're thinking about applying for a microloan:

Who qualifies? Accion will consider any entrepreneur with a credit score above 575, who doesn't have past-due accounts in excess of $3,000 and whose business doesn't involve real estate investing, multilevel marketing, adult entertainment or firearms. They must also rent their space or hold a fixed-rate mortgage and own fewer than three properties.

How does one find a microlender? The Association for Enterprise Opportunity, which focuses on the microenterprise industry, keeps a list of members on its Web site. Most of these are regional lenders. Accion is a good place to start because it provides loans nationwide.