I recently met Stacy Sanchez of San Diego-based non-profit, CDC Small Business Finance, to talk about the SBA’s microloan program. I’m convinced that microlending is an important financing tool for many of the smallest small businesses, and am a big fan of what these non-profit lenders bring to the community.
The SBA microloan program provides loans up to $50,000 for qualified small businesses—right in the sweet spot for many young companies looking for capital to start up or expand. These loans are made available through non-profit community-based lenders (like CDC in San Diego), and according to the SBA, carry an average loan size of about $13,000. The averages might be different depending upon the individual lender—for example, Sanchez told me their average loan size is closer to $35,000.
Ty Kiisel: Hi Stacey, tell me a little about CDC Small Business Finance.
Stacey Sanchez: We’ve been around for over 30 years and in addition to microlending, we’re the SBA’s biggest CDC/504 lender in the country. We’re also part of the Community Advantage Loan program, which is part of the SBA’s 7(a) loan guarantee plan. As far as the microloan program is concerned, since that’s what we’re talking about today, we work with a lot of veteran-owned business owners as well as other small businesses in low- to moderate-income areas that can leverage a relatively small SBA loan to build healthy businesses that ultimately hire local employees and provide a pretty substantial impact in their communities.
Ty: Can you explain how the SBA’s microloan program works?
Stacey: As a microlender, over the last 12 years we’ve worked as an intermediary for the SBA, lending between $5,000 and $50,000 to individual small businesses (in California, anything under $5,000 is considered a consumer loan). We often work with local banks that want to maintain their deposit relationships with these business owners, but aren’t able to provide business loans to them. There are a number of reason a bank might not be able to offer them a loan—it might be because the businesses don’t have enough track record, it could be a less-than-perfect credit profile, or the requested loan amounts could be too small for the bank to cost-effectively help them.
Ty: What does the average business owner you work with look like?
Stacey: We work with many different businesses. Restaurants, small merchants, and other businesses the average person might associate with Main Street. We help a lot of startups get off the ground as well as some businesses that might have been around for a while, but don’t need a lot of capital. Many businesses could be a fit for the microloan program depending upon the nature and size of the business, and where it’s located.
Ty Kiisel: How do you evaluate these businesses to determine if they are a good fit for what you’re doing?
Stacey Sanchez: We’re looking for strong businesses with reasonably good credit, but they might not meet all the requirements at the bank.
Ty Kiisel: How do you mitigate the risks perceived by the banks when you offer these businesses a loan?
Stacey Sanchez: We look for business owners that can demonstrate an ability to repay a loan. A good business plan is important, but we’re even more interested in whether or not they have the cash flow to make the loan payments. A strong wage earner in the household is critical. We can’t help a startup founder, for example, who needs the loan to pay himself or herself a personal salary to get things going.
Ty: What other criteria are important?
Stacey: A good personal credit history is important to us too. We want to see a score of 650 or better. And, because we make what we call projection-based loans, we want to see a plan that shows how the business owner is going to use the funds they’re borrowing to build the business.
Ty: Do you have a good success story you can share with us?
Stacey: Yes I do. Not too long ago I met a woman who had been working in a flower shop for 10 years. After graduating from college, she stayed in the shop and her responsibilities within the business continued to grow. When the business owner decided it was time to sell, he offered the business to her. Even though she needed a loan to purchase an existing business, because she was a new owner, it was considered a startup and she wasn’t able to get a traditional loan at the bank. We helped her with a microloan, which made it possible to buy the business, keep the doors open, and she’s even added employees since purchasing it.
Ty: Do you have any advice for a business owner anticipating growth and the need for financing?
Stacey: Make sure you do you taxes on time and have a good accountant or CPA that knows what your goals are. Many accountants want to help you reduce your taxable income as much as possible, but it’s important to show some income if you plan to borrow to fund growth. You also need to maintain a good personal credit score as well as build a strong business credit profile. And it never hurts to have some savings set aside—lenders like to see that you have some skin in the game. Additionally, I advise most startups to keep their jobs if they need to take home a salary of some kind. It’s very difficult to borrow to start a business if you need some of the money you’re borrowing to pay yourself.
Ty: There are lots of resources available to help small business owners potentially fill in the blanks with information they might need to build successful businesses, do you have a favorite or two?
Stacey: The SBDCs (Small Business Development Centers), often sponsored by local universities and community colleges all over the country, are great places to look for advice. And SCORE is another great resource that provides experienced executives who volunteer their expertise to help companies build strong and healthy businesses. There are other free services available to small business owners, but these are the two I recommend the most.