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Payday Small Business Loans

By Keith Loria for America's Backbone Weekly

Finding money for a small business is always challenging, but thanks to the Great Recession of 2008, today's businesses—both new and existing—still find it harder than ever to get the money they need, even on short-term loans.

A recent study from Hiscox Insurance, "The DNA of an Entrepreneur," includes insights from small- and medium-sized businesses across the U.S., providing a unique and revealing portrait of the financial pressures, stresses, opportunities and challenges faced by entrepreneurs.

"Struggles to find funding continue: 65 percent of U.S. small business owners agree that finding financial funding for a new business is difficult to find," says Bronek Masojada, CEO of Hiscox Insurance. "Also, despite growing awareness, 92 percent of all SBOs have not thought about using crowd funding."

Where once your only option was a payday loan -- and the associated high interest rates that came with it – today micro-lending institutions give you better, and more flexible options.



Payday loans are usually small, short-term loans, intended to cover a
borrower's expenses until his or her next payday. While the terms vary by lender, normally the borrower's next paycheck is used as collateral, and there are additional interest charges and fees added on.

Microloans serve as alternatives to credit card financing or payday lending-type institutions, which are both characterized by high interest rates (18-55% A.P.R. being typical) and poor terms.

David J. Hall, public affairs specialist at the U.S. Small Business Administration (SBA), says microloans are often associated with accompanying training and technical assistance to borrowers.

"This level of assistance (e.g. business plan assistance, marketing, accounting training, etc.) is crucial to start-ups and other very small businesses that would not receive this type of training with a typical business loan," he says. "It increases a borrower's capacity to succeed and accordingly, increases loan repayment ability."

The SBA considers any loans smaller than $50,000 to be microloans, and they can be as small as $500 to $1,000. At this size, many commercial lenders will not fund such loans because they are simply not profitable enough.

SBA's Microlenders, and other mission focused lenders that have committed to making smaller business loans (like many credit unions) tend to have a focus on a double bottom line; that is "doing well" (a sustainable business model) while "doing good" (meeting the needs of underserved segments of their market) at a price that does not take advantage of the consumer's inability to access traditional financing.

Those who benefit from micro-lending include would-be entrepreneurs who dream of owning their own business -- no matter how small; those unable to obtain affordable credit from a traditional bank and unwilling to pay the high price attached to typical non-traditional lending sources; those needing extra training or "hand-holding" before a loan is made, or even throughout the loan term; and those who see self-employment as a way of achieving self-sufficiency.

A typical microloan from an SBA intermediary offers very reasonable rates: most often 8% or less.

Since the SBA Microloan Program was created in 1992, SBA Microloan Intermediaries have made more than 55,000 loans totaling more than $670 million. That's an average loan size of just $12,000.

"The Program helps graduate former borrowers to traditional financing. Between 2002 and 2012 more than 2,000 former micro-borrowers graduated to qualifying for a regular SBA loan from a bank averaging $50,000 a loan," Hall says. "Nearly 50% of SBA Microloans have gone to women-owned businesses, nearly 20% to Hispanics, and more than 25% to African Americans. No other SBA loan program is as successful in reaching these underserved markets."

To find an SBA Microloan Intermediary, check out www.sba.gov/content/microloan-program.

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