How microloans are helping small businesses expand
Well known among most business school professors is that small businesses make up the core of an economic recovery. In fact, according to the Small Business Administration, over 97 percent of all exports from US firms originate with small businesses. While the credit crunch and mortgage crises of 2008-2010 in the U.S. brought much of the small business lending to a standstill, the demand for loans for small businesses continued as many newly unemployed sought to replace past income with a small business. As credit dried up at banks, microloans made many small business ventures possible, and this trend continues.
Even small businesses need working capital
Businesses need working capital, and small businesses are no exception. Prior to the economic meltdown and the great recession of 2008-2010, many small business owners tapped home equity or low interest secured loans. Once that source of funds dried up, microloans—conceived and studied by Muhammad Yunus, who also received a Nobel Prize in Economics for his efforts—came into play and, while still relatively new in the U.S., are having a very positive impact. In the U.S., microloans are larger than the microloans normally used in developing nations, and this is a reflection of the cost of living in the U.S.
The U.S. government has recognized the need for small businesses to have access to working capital, and the Small Business Administration (SBA) has recently increased its loan levels from $35,000 to $50,000. The SBA is using a number of nonprofits to qualify and guide applicants through the process. An important requirement of an SBA microloan is that it must help your business create a new job and income for the applicant or for people with low to moderate income. The applicant must also be current on existing debt, have no tax liens, and not be within one year of a past bankruptcy.
Small business success
One area of small business success is in Southern California, where Valley Economic Development Inc. of Van Nuys makes loans that average about $12,000. For every loan, one to two jobs are created or retained, according to Eric Zarnikow of the SBA. Such loans include an $8,600 loan to a photographer who estimates he can use that to purchase digital equipment and increase business by $50,000 annually. Another includes $17,000 to a dental lab that will allow them to pay off debt, buy equipment and hire a part-time technician. While they could have financed the loan on a credit card at a 29 percent interest rate, the SBA microloan program allowed them to borrow money at only 10 percent. That difference is what persuaded them to expand their business.
The number of small businesses that have sprung up during the 2008-2010 recession may be surprising to some, but the American Association of Retired Persons notes that 40 percent of the self-employed are over 50. This age group has been hit especially hard by the recession, and many of them are taking their skills and experience to new ventures that involve small business and self-employment. Microloans directed toward this segment result in job growth and increase transactions in goods and services. This can only be accomplished by increasing the lending capital to this market and others like it.
Small businesses are nimble organizations and the owners of such a business can be very quick to hire help to keep up with demand. By making small loans of $50,000 or less available to these business owners, it is possible to enhance the economic recovery that has been considered anemic at best. The SBA has made the process easier and less expensive for the entrepreneur to achieve desired expansion so that small business and the economic recovery can continue.
