By Rich Bailey

Many small businesses believe that bank loans aren’t a viable financing option for them. However, there is a lesser known but well established option that is much more accessible — the microloan.

Lending in small amounts to businesses that cannot qualify for a traditional bank loan is not a new idea. Modern microlending — also known as microfinance or microcredit — began with the Grameen Bank, founded in 1976 in India. Since microlending came to the United States in the late 1980s, small loans have become widely available from programs backed by the U.S Small Business Administration (SBA) as well as purely private programs.

The U.S. Small Business Administration’s average “small business” loan was $417,316 (2016), while its average “microloan” was $13,884 (2017) Some lenders offer loans as small as $500.

As is so often the case with starting a small business, however, availability doesn’t always translate smoothly into awareness or access: many small businesses need capital, but lots of small business starters don’t know about microloans. Others may assume they can’t qualify because of a poor credit history.

Here’s how one community organization works to bridge the awareness and availability gap for small business starters that need funding.

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Create Birmingham’s Spectrum of Starter Funding Support

Create Birmingham is a nonprofit economic development agency focused exclusively on creative industries in Birmingham, Alabama. Their programs include a 9-week small business training curriculum offered by CO.STARTERS.

After a survey of its CO.STARTERS graduates, Create Birmingham found that one of the biggest needs of these small business founders was funding to take the next step to grow their business, in 2017 Create Birmingham developed a microlending program as well as two grant funds for businesses that may not be ready for microloans. All three funding pools are part of a continuing spectrum of support for CO.STARTERS graduates.

“Our role is to serve as a small town banker with a heart,” says Jessica Moody, Create Birmingham Programs Manager. “We already have a relationship with these businesses. We’re very hands-on, so most of them trust us very well. We have done loans for people who have very poor credit, and it has helped moved them to a place to better their cash flow.”

The Revolving Loan Program, created in partnership with the Welch Group Foundation and Venture South, a local community development financial institution, makes small traditional loans. Graduates of Create Birmingham’s CO.STARTERS program can apply for loans of up to $7,500. Loans from their program cannot be the sole source of capital for a new business.

For CO.STARTERS graduates that may not be ready for a loan, the agency also operates two small funds, established through the Mike & Gillian Goodrich Foundation. Payments from these funds do not have to be repaid. The Advisor Fund offers $500–1,000 grants for business setup costs, such as legal, financial and branding expertise. The Marketplace Fund offers the same amount to cover marketing expenses, such as fees for popup events, market booths, and mobile retail.

Annual grants to Create Birmingham established funding for these two grant pools, which have been funded at $10,000 for each program in 2017 and 2018. The agency plans to seek higher funding in 2019. Revolving loans are made from a $50,000 fund created by $25,000 from the Welch Group Foundation and matching funds from Venture South. The fund has been so successful that the Welch Group Foundation is giving an additional $75,000 to increase the loan pool.

People apply for all three funding pools through Create Birmingham.

“For the grants, we talk about how the funds will help move them forward, what they’re ready for, and how it’s actually going to help them make the next leap,” says Jessica. “For the revolving loan we talk about their cash flow, we do some projection analysis, we look at bank statements, how much they think than can afford to pay back in a loan. I make sure they are good and ready, and then I walk over with them to their meeting with Venture South. It’s typically a yes before they ever get there.”

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How Starters Use Create Birmingham’s Microloan Programs

Most microloan recipients apply to the two smaller funds first. The experience of a restaurant owner shows how the three funding programs work together.

CO.STARTERS graduate Andrea Foster accessed Create Birmingham’s microloan programs to help launch her restaurant, the Preservery, which is now expanding to a larger location. (Photo: Alyx Chandler)

After graduating from Create Birmingham’s CO.STARTERS program, Andrea Foster wanted to apply for both smaller funds, but Jessica advised her to hold off on the Marketplace fund until she had completed the planning that would be supported by the Advisor Fund. She used the Advisor Fund for legal fees to create her business, then used the Marketplace Fund to help open her Preservery restaurant — described as “elevated soul food” — in REVeal Kitchen, a food stall / incubator operated by REV Birmingham, another economic development organization. Jessica also encouraged her to apply for the Revolving Loan.

“Venture South actually gave her $10,000, including $7,500 from our pool plus additional funds they wanted to invest in her,” says Jessica. “She paid that back relatively quickly, went back and got another larger loan outside of our pool. She’s now opening a restaurant, and she went back for a third loan. All that has happened in the past year and a half or so.”

Jessica is quick to say that Create Birmingham is not entirely responsible for Andrea Foster’s success, but this starter’s experience clearly shows how small increments of funding at the right time can help leverage more substantial loans from other sources to help a business grow.

Microloans can serve as an entry point for starters to establish or rebuild credit. They can provide gap funding to complete the overall funding for a small business launch.

In 2017 and 2018, nearly $40,000 has been granted to 32 CO.STARTERS graduates in Birmingham from the Advisor and Marketplace funds. Other businesses benefitting from Create Birmingham’s three funding pools include:

  • A yoga studio whose founder used the Advisor Fund initially and then later tapped the Revolving Loan Program to purchase inventory for a retail program. “Her credit was pretty low, but we vouched for her, and Venture South made the loan, which will help raise her credit score,” says Jessica.
  • A retail boutique whose founder used the Revolving Loan Program to obtain working capital to purchase inventory for the holidays.
  • A home-based bakery funded an expansion into a warehouse baking space using a loan from the Revolving Loan Program, together with prize money from winning a pitch competition and additional loans from Venture South.

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More Microloan Resources

Venturize is a free online resource hub for small businesses owners. Managed by national nonprofit Small Business Majority, Venturize helps small businesses learn about small business lending and become loan-ready.

Kiva is an international crowdfunded microlender that serves as an intermediary between low-income entrepreneurs and crowdfunded sources of capital.

Lender Match is an nationwide online referral tool from the Small Business Administration (SBA) to connect small businesses with SBA-approved lenders, including those that make microloans.

Accion is a nationwide, nonprofit lending network of community development financial institutions (CDFI) that make microloans.

Community Organizations — Many local and regional nonprofits across the United States work with the U.S. Small Business Administration, community development financial institutions, and private banks to provide microloans within their community. Community lending organizations often serve more than one state — for example, Pathway Lending in Nashville serves Tennessee, Alabama and Kentucky — so a search for a local lender actually should be regional. Credit unions may also be a local source for microloans.