Microloans – loans ranging from $100 to $50,000 – can provide start-ups with needed capital quickly, but operating effective microloan programs requires a balance between serving client needs and maintaining sustain-ability. "You don't want to spend $2,000 to make a $1,500 loan, so programs need to be careful that they don't commit too many resources that won't be covered by fees or interest income," says Chuck Wolfe, president of Claggett Wolfe Associates in Auburn, Calif.
Microloans can help start-ups with viable products and services meet cash flow needs, such as when sales and receipt of payment do not synchronize with payroll or operating expenses. Wolfe says for loans less than $35,000, incubators still need to emphasize market analysis, management capacity and pro forma financials, but they can place more emphasis on evaluating the creditworthiness of the deal rather than past business performance. "The key is to determine the borrower's personal financial stability and willingness to repay," Wolfe says.
To help clients understand the obligations associated with a loan, Wolfe says incubators can use a forgivable loan format (e.g., scholarship/grant) where funds are disbursed as the client reaches predetermined milestones.
Jack St. Pierre, executive director of CAN BE in West Hazleton, Pa., developed a small (<$25,000) revolving microloan program with funds from local banks and utility companies. CAN BE has made five short-term (90-day to 360-day) loans to clients, with a maximum amount of $5,000. St. Pierre says all the loans were repaid, and the loan fund has helped his clients prosper. "One client used the program twice as bridge financing, and they are now graduated and very successful."
St. Pierre says regulatory lending issues that vary by state may restrict who can oversee and monitor loan programs. CAN BE administers its program through an advisory committee with assistance from the accounting department of the incubator's parent economic development company, a certified Area Loan Organization in Pennsylvania. "All loans are collateralized with business assets and the personal guarantees of all principals," St. Pierre says.
Michigan offers a variety of geographically defined microloan programs throughout the state. Managed by SPARK Business Accelerator in Ann Arbor, Mich., the loan program offers innovative technology companies up to $50,000 for two years to help them reach commercialization. The model is a little unorthodox because loan recipients could be in development stages (i.e., preproduct or service). Clients can use the funds for operational costs, such as travel, creating prototypes, hiring or production materials to fill purchase orders.
"Grants are for soft services like strategic planning," says Skip Simms, senior vice president of SPARK and manager of Michigan's microloan programs. "It is difficult to find a grant to cover operating expenses to meet customer needs or hard costs for equipment. The funds fill a much-needed gap."
In the third year of operation, Michigan's current microloan pool is $275,000, and it funds about seven to eight loans annually. These subordinated loans have a nonnegotiable, fixed rate of 12 percent on a two-year term with a balloon payment. There is no early payment penalty, no equity and no warrant, and the loan is not forgivable.
"The loans make a huge difference," says Simms. "Companies don't need large amounts of money, but they are not quite able to close a round of financing from VC or angels. They have bootstrapped as far as they can. The loan funds allow them to achieve that last milestone."—Bridget Lair
Keywords: Funding sources/Fundraising – incubator, economic development, In-house loan and equity financing program, Angel investors/network, capital access, microenterprise
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