Insights
How Microloans Help Small Business Owners Stay Profitable
By Ellen Chang
Fast cash to maintain financial flow and business operations.
For the past year, Angus Leung has devoted more time to growing his business and obtaining larger orders for his electrical wholesale distribution and importing company.
A microloan from East West Bank has alleviated any cash flow issues he might run into, since he needs to pay for his electrical products imported from China upfront and also give his customers 30 to 60 days to pay for their items.
“It’s been really helpful because cash flow is important for my business,” says Leung, president of Na Industries International Corp., a Jersey City, N.J.-based company.
Founded in 2006, Leung is expanding his company by determining the longer-term needs of his clients in order to establish a smoother flow of his supply chain, and avoid potential logistical issues, since he imports products from Asia. For the past five years, his company’s growth has expanded by 30 percent each year.
“I have to give credit to my customers, and, when my goods arrive, I have to pay for them,” he shares. “It’s nice to have a little cushion to bridge that gap. The microloan really helps with that.”
Now Leung says he can plan the yearly orders of his customers and create a better cash flow, which helps his current clients.
“In business, it’s all about relationships,” he says. “We have been very busy the last few years, and there are obviously a lot of costs are associated with that.”
Microloan advantages
Microloans provide working capital for smaller businesses as they grow or expand, and are good options for entrepreneurs starting a new venture because they don’t require any physical collateral or perfect credit history. The Small Business Administration (SBA) also backs some microloans, lowering the risks for banks in case a company defaults on the loan.
These loans are lines of credit, and they operate much like home equity loans. Business owners utilize and draw down on the funds, as needed, and the line of credit can be renewed each year as it is paid back.
Nathaniel Conan, manager of the East West Bank 8th Avenue branch in Brooklyn, has helped many small businesses obtain microloans.
“It is a revolving loan and works like a credit card,” he says. “Businesses pay the interest each month.”
He says companies typically obtain a line of credit for a year to pay for expenses related to inventory, equipment, furniture, payroll, or other bills.
“These loans provide a solution for the company’s cash flow needs in order to expand their business. It helps them with the dips of the business cycle, especially for seasonal businesses,” he says.
The loan amounts typically range from $2,000 to $15,000. The average loan amount is $13,000 and is sometimes provided by non-profit lenders or community-based financial institutions, which offer lower interest rates of 8-13 percent. A “good rate for a startup that has no real track record,” says Jeff Golding, chief growth officer at IRH Capital, a Northbrook, Ill.-based financial company. These non-profit lenders include the SBA, small-business institutions, and the Aspen Institute, a Washington, D.C.-based educational and policy research nonprofit group.
"These loans provide a solution for the company’s cash flow needs in order to expand their business. It helps them with the dips of the business cycle, especially for seasonal businesses."
Quick access for faster solutions
Microloans have emerged as a large, booming industry and are geared towards helping new entrepreneurs or small businesses with few employees, Golding says. The advantage of these loans is that businesses can obtain the capital usually in a few days and can be used for any purpose.
“It’s easy and fast, which helps when startups need to make payroll and don’t have time to worry about the whole loan process,” says Golding.
A microloan comes in handy when businesses find themselves in unexpected situations, such as the extreme rainfall in California last January, the slowing down of sales at fast food restaurants, or even extended street construction that impacts foot and vehicular traffic.
“New businesses are often operating day-by-day. When your sales takes a huge hit, these loans can help when you are cash-strapped because your sales are down by 80 percent,” continues Golding.
Some microloans are structured where the interest is tallied daily, while others are weekly or monthly. The higher interest rates are an added expense for small businesses already struggling to survive, but these loans are usually short-term ones that range from three months to 36 months and do not require any collateral, Golding says.
Despite the higher costs associated with microloans, there are many success stories of businesses that are committed and have a good business plan, he says.
“These loans can help you take your business to the next level,” Golding says. “They can provide the step for companies to break even, such as when a construction company wins a bid, but then has to buy materials and hire workers. Borrowing $20,000 and paying $2,000 to $5,000 on interest can be a no-brainer. If you are able to recoup the costs, then the return-on-investment may be worthwhile.”
What you need to qualify
Small businesses which qualify cannot have revenue over $1 million annually, must be in good standing for at least one year if they are an existing bank customer, must be in business for more than two years if they have been a client for at least two years, and be in business for five years if they have been a client for only one year, says Conan.
The business credit score must be at least 720, but if they have been in business for five years, companies can qualify with a 700 credit score. The interest rate is pegged to the current prime rate, which is 4.25 percent.
“These loans can be pretty useful,” he says. “Some businesses need to purchase additional inventory because this is the only way for them to grow it.”
Since the microloans are not based on a company’s revenue, cash flow analysis, profit, existing debt or other financial metrics, the underwriting process is more lenient.
“In New York, we work with wholesalers, a few retail stores and even some real estate management companies,” says Conan. “It helps start their loan relationship with the bank, and gives us a picture of the customer’s character and credibility and how the business is growing.”