December, 2002
Feature
Inspection News and Views from the American Society of Home Inspectors



How to Find a Micro-Loan for Your Business

DON SADLER

It’s a common scenario for many 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 qualify for a small-business term loan from your bank.

Fortunately, there are more options available today than ever before for micro-businesses that need micro-loans of less than $10,000. In fact, it’s probably easier to land micro-financing today than it was back in the “old days” when unsecured personal notes from banks were fairly common. Here’s a look at several common sources of micro-financing available to self-employed professionals 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 seasonal business,” Siedlecki says. He notes that in a survey by Inc. magazine, more than half (67 percent) of the magazine’s Hall of Fame CEOs funded their companies with a bank line of credit.

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

Banks use what’s called credit scoring to evaluate these small credit lines. This means they use sophisticated computer models to assign each application a “credit score” and then make the loan decision based on this score.

“Keeping a strong, clean, personal credit history is the most important factor for any self-employed professional seeking financing,” says Andy Harmening, senior vice president and regional manager with U.S. Bank. “Entrepreneurs and their businesses are so closely tied together-in a sole proprietorship, they are literally one and the same-that we want to see how they handle their personal financial affairs. This is how most self-employeds begin to establish a track record.”

With an established small-business credit line, you can borrow just the amount 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 flexibility in managing your cash flow.

As you pay-down your line, the money becomes available for you to use again (hence the term revolving credit line). 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 have enough business history to qualify for a small-business line of credit, consider applying for a home equity line of credit. If you own your home, you can borrow money against the equity you have built.

“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 simply writing a check. Most banks set a fixed time period for the line of credit, such as five or 10 years, after which time you may be able to renew, or you may have to repay the line in full.

Be sure to shop around for your home equity credit line because rates and terms vary tremendously. The best place to shop is on the Internet. Start at www.bankrate.com or www.lendingtree.com. These sites let you compare rates and terms from many different lenders online. Make sure you check your personal credit report before you apply for a line. If you have strong personal credit, you should be able to secure a low-interest line with no closing costs or annual fees.

Of course, the most important thing to remember with a home equity line of credit is that you are pledging your home as collateral against the loan. If you’re unable to meet the minimum payment obligations or to repay the line in full at the end of the term, the bank may repossess your house. Weigh this risk carefully if you’re going to consider a home equity credit line to help finance your business.

Credit cards

Credit cards are becoming an increasingly common source of financing for small-business owners and self-employed professionals. The biggest plus of using credit cards to finance business expenses is how easy it is. If you have just decent personal credit, you probably throw away unsolicited credit card applications every week. Most offer unsecured (often even pre-approved) lines of $5,000 or $10,000. Just sign the acceptance form and look for your card in the mail in a couple of weeks.

This convenience comes with a price, though. The biggest drawback of using credit cards is the high interest rates – usually ranging from the mid-teens to 20 percent or higher. But there are a few ways to get around paying such high interest rates. Most cards now offer “teaser” introductory rates of around 5.9 percent or lower for the first six months. So if your financing need is short-term, just make sure you pay off the balance on the card during the introductory rate period.

Or you can play the credit card juggling game that has become popular during the last few years. Before the low introductory rate period expires, transfer your card balances to another new card with a low introductory rate for balance transfers. Theo-
retically, you could do this every six months or so until you run out of new card options. But be warned – transferring balances like this more than once or twice could adversely affect your personal credit report.

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 financial reports and extensive business and travel services, that can make them a useful cash management tool for your company.

The Small Business Administration

The SBA helps banks make loans to businesses that generally 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. 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 require some type of collateral and usually a personal guarantee from the business owner.