Small Business Financing Microloans - YouTube

-Hi, I'm Brandi Stitt with the Women's Business Center and we work very closely with clients

that are applying for microloans, which are loans that range in size between $500 all

the way up to $50,000 and are really intended for clients that are not yet ready for a bank

loan for a variety of reasons ranging from lack of collateral that might be required

by a traditional lender, could be that their credit score's not quite what a traditional

lender's looking for or the amount just may not be large enough for that lender to be

able to make that loan.

Microloans are really ideal for companies that are at either concept stage or at the

very early stages of their business that really just need a small amount of capital, possibly

to purchase some computer equipment or some software for the business.

It could be that they have a small inventory purchase that they need to make but they just

don't have the cash flow in the bank yet to be able to make that inventory purchase.

So, what's really been tremendous in the Kansas City Market is that we were void of microloan

products up until about 2012 when we brought Justine Petersen into the market.

They've put $5,000,000 worth of loans into the Kansas City Market and in over 500 different

loans so that's 500 businesses, give or take, that have received microloans through Justine

Petersen.

What we've seen since then is that there are other microlenders now popping up in the community,

which is really fabulous.

So, we didn't have any for a while then we just had one.

Now, starting in 2015, what we've seen since is that there are three additional microlenders

on the scene in Kansas City.

The Women's Business Center has a microloan that we launched in 2015.

The Hispanic Economic Development Corporation has a microloan that was previously not functioning

but now they have received additional funding and they're making loans again.

And AltCap, which is formerly the Kansas City Missouri CDE, has received their CDFI status

and are now providing microloans, as well, to Kansas City, Missouri businesses.

So, we're working towards becoming a very microlending rich community to be able to

provide those early stage, unbankable businesses with the funding that they need which is a

really exciting time for Kansas City.

What's most important for anyone applying for a microloan and quite frankly anyone applying

for any debt product is that they have a really well thought through business plan with startup

projections and annual financial projections.

We want to make sure that this business is going to be viable before we present any kind

of a debt product and put them on the hook for that loan repayment, so we're really looking

for those solid business plans and financial projections but then, of course, we are expecting

to see some of the similar financial documentation that any lender will need for a loan applicant

so that would be things like proof of income, so it could be W-2 statements, we're looking

at tax returns, we want to make sure that the income that they're reporting matches

what is on those tax returns.

We're looking at bank statements for the last three months, we want to make sure that they

do have cash coming in and out of those bank accounts and that they aren't regularly overdrafting

those accounts.

So we're looking at the traditional proof of income as well as what are the collateral

items that you might be willing to pledge for this loan?

What do you think the estimated value for those collateral items would be?

And then, of course, an itemized listing of the total amount of funding that you need

but how are you planning to use those funds?

What portion of that will go toward inventory?

What portion is going to go to an equipment purchase?

And what portion is going to go to working capital because that is another source of

use for that fund which is a little unique for the microloans.

Some of the advantages for microloans are, you know, really just that introductory seed

capital for an individual that, again, is not ready for a bank loan.

So, these are ideal for clients that don't have a strong track record when it comes to

credit building or credit history.

It's ideal for clients that don't have a significant amount of collateral or the collateral isn't

exactly a one-to-one match.

So, for example, when it comes to collateral, microlenders are very flexible in terms of

how we look at the value of that collateral.

So a bank may say, "We want to make sure the collateral, if you're asking for $20,000,

we want to see $20,000 worth of collateral and it has to match exactly."

Whereas we might say, "Okay you're looking for $10,000 and all you have to offer us is

a vehicle worth about $5,000 but we know that that's the only vehicle for your household

and that's a really, really important piece of collateral and an important asset for your

family.

If you're willing to pledge that for the microloan, we'll accept it.

It doesn't have to be a one-to-one match because the value that that item has to you as the

business owner is so high that we know that you're going to be willing to make that loan

payment to keep that asset."

The biggest negative for a microloan is that there are going to be higher interest rates

attached to a microloan.

So typically, what you're going to see in a microloan product is an interest rate anywhere

between 8 to 12%, which is higher than what you're going to see with a traditional lender.

Most traditional lenders are going to be looking at typically 4 to 7% on a business product,

maybe something lower on a personal loan product and so we don't want to keep our clients in

a microloan forever because we don't want them paying those higher interest rates.

Our goal is always to get them graduated to a traditional loan so that they have access

to cheaper money.

So our hope is that through the microloans, we're building their credit score, we're helping

to grow the financial history of that business so that they have a successful track record

to show a traditional lender, which will give them access to those lower interest rates.

Despite the fact that you're applying for a microloan, we still want you to have a relationship

or start building a relationship with those traditional lenders and we can always help

make those connections with bankers that are very favorable to small business and that

will work creatively with our small businesses.

They think that it's so important to start building those relationships early with traditional

lenders while you're working with your microlender as well.

Have that business plan in place, have those financial projections ready to go and make

sure they're realistic.

We'll look at those financials and say, "Gosh, I really think you're overestimating what

your sales are going to be for the first year or maybe you're underestimating what you think

you're going to be spending on your lease over the course of that year," so make sure

they're realistic and then be in a position where you can explain anything that might

be negative on your credit report.

We want to know, if we see something negative, we will work with you on it but we just want

to know up front why it's there and what happened in that situation and what your plan was to

move past that.

And then I guess my final advice would be to try to be as organized and present your

full loan package as completely as possible.

The more information we have early on in the process, the more quickly we'll be able to

process that loan because we really can't process a loan until we have all the completed

documents so as soon as we get those, we can start processing the loan so keep your paperwork

in order.