Need A Micro-Loan?

Don Sadler It’s a common scenario for many small business owners and self-employed professionals: You want to borrow money to buy a new computer system, or refurbish your home office, or shore up inventory in anticipation of your upcoming busy season. But you don’t need to borrow enough to apply for a traditional term loan.

Fortunately, there are more options available today than ever before for micro-loans, generally defined as loans of less than $10,000. Following is a look at several common sources of micro-financing available to businesses today:

Small Business Line of Credit—Establishing a small business line of credit is a smart move even if you don’t need the money right now, says Richard Siedlecki, an Atlanta-based small business management consultant. “A bank line of credit allows you to get the funds you need when you need them, such as to help you cope with the ups and downs of a seasonable business.” Siedlecki notes that in a survey by Inc. magazine, more than half (67%) of the magazine’s Hall of Fame CEOs funded their companies with a bank line of credit.

Most banks today offer unsecured lines of credit targeted to small business owners. If yours is an established company, you may be able to apply for a credit line amount of between $10,000 and $50,000 by completing a simple one-page application, with no business financial statements or tax returns required.

With an established small business credit line, you can borrow only what you need anytime you need to. You pay interest only on your outstanding balance, and you can usually make interest-only payments each month, which gives you a lot of flexibility in managing your cash flow. As you pay down your line, the money becomes available for you to use again. The interest rate is usually variable and adjusted to reflect the prime rate as published in The Wall Street Journal.

Home Equity Line of Credit—If you don’t qualify for an unsecured credit line, you may be able to establish a business line of credit secured by the equity you have built in your home. “The equity in your home can be an excellent financial resource,” says Siedlecki. “Interest rates are still very attractive, and the interest you pay is usually tax-deductible.”

A home equity line of credit works in much the same way as a small business revolving line of credit. Your bank will use a simple formula to determine the amount of your credit line; then you can borrow up to this amount whenever you want, for whatever purpose you desire—including financing your business—usually by simple wiring a check.

Credit Cards—Personal credit cards are becoming an increasingly common source of financing for small business owners and self-employed professionals, According to a 1998 survey by National Small Business United, nearly half (47%) of small and mid-sized business owners used credit cards to finance their companies. If you have good personal credit, you can probably secure one or more cards with credit lines of $5,000 to $10,000 or higher.

As long as you’re obtaining a credit card for business financing purposes, consider applying for a business, rather than a personal, credit card. Business cards offer unique features, such as detailed management reports and extensive business and travel services that can make them a useful cash management tool for your company. And using a business card helps you keep business and personal expenses separate.

The U.S. Small Business Administration (SBA)—The SBA helps banks make loans to business that normally wouldn’t qualify for financing under normal bank lending guidelines. The SBA’s MicroLoan program makes short-term loans of up to $35,000 available to start-up and growing small businesses. The loans are actually made by banks, which receive applications from borrowers and make the credit decisions themselves. The average size of an SBA MicroLoan is about $10,500.

These are more like traditional term loans, with a fixed interest rate and repayment schedule (up to a maximum of six years). Each bank has its own lending and credit requirements, but most will require some type of collateral and usually a personal guarantee from the business owner.

Family and Friends—If all else fails, well, there’s always your rich Uncle Harry, right? Seriously, many a small business has been started and maintained with money from family and friends who believ3e in the entrepreneur and want to lend (literally!) a helping hand.

If you decide to go this route, it’s important that you formalize the loan in the same way you would a loan with a bank, says John Barrickman, president of the financial consulting firm New Horizons Group in Roswell, Georgia. “Treat the loan as an arm’s-length transaction—this means you should draw up a promissory note with a defined repayment term and a defined interest rate, preferably tied to the prime rate,” he says. “If nothing else, you’ll need an official note to be able to deduct the interest.”

What about collateral? “This can be a touchy subject,” says Siedlecki, “so be sure to talk about it upfront. A friend or relative is probably not interested in securing any of your business equipment or furniture, so collateral should probably be something you own personally that’s of a similar value to the amount of the loan.”

Venture Capital and Angel Investors—If you’re willing to give up some ownership in your company in exchange for financing, you might consider searching for a venture capital partner. Venture capitalists invest money in promising new companies in exchange for an ownership stake. They are very selective about the companies they invest in, though, searching only for those with the highest and fastest growth potential.

If you’re unsuccessful in attracting true venture capital funding, you might be able to land some cash from “angel” investors. Angels, like venture capitalists, are investors on the lookout for promising new companies offering attractive potential returns. They may be business associates or even friends and family members.

A final thought
Remember that keeping a strong, clean personal credit history is often the most important factor for small businesses and self-employed professionals seeking financing. Entrepreneurs and their businesses are so closely tied together—in a sole proprietorship, they are literally one and the same—that banks want to see how you handle your personal financial affairs. Even as a business owner, it’s never too early to start cleaning up your personal credit.

Don Sadler is an Atlanta-based writer and editor specializing in issues of interest and relevance to small business owners.

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