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Rebecca Schulman didn't need a million dollars to get her business started. She needed just enough to make solid prototypes of the gender-neutral baby gear she had in mind, attend trade shows, and figure out sourcing. But Schulman, an untested entrepreneur, was light on specifics regarding the costs involved and how the products would be made.
"Since we were in the early stages, we were told it would be difficult to get an SBA loan or any traditional loans," she explains. And she and her husband soon learned it was going to take more than tapping into their personal savings and getting some help from friends and family to get Boston-based Papa Products off the ground.
After making phone calls to state government offices, the city of Boston and any economic development offices she could find, she heard about a microlending firm called Accion USA that made smaller loans to entrepreneurs.
She got on the company's web site and decided to put in a call. Within a few months she got a check for $10,000, just the amount needed (the average microloan is about $12,000 to $13,000). "It was an amazing start for us," she says about the loan that had an 11 percent interest rate. "It gave us confidence that this idea has merit and someone believed in us."
With traditional lending sources keeping a tight lid on loans and credit lines, and with credit card rates skyrocketing, many would-be business owners without a track record have been forced to find alternative ways to get the money they need.
Microlending is filling that void for some, especially for those looking for small business loans under $50,000 for early-stage funding, says Bruce Phillips, senior research fellow at the National Federation of Independent Business. "If you've taken a look at the three 'F's'--family, friends and fools--and have come up dry, and don't want to put it on a 22 percent credit card, microlending is an option," he says.
Typical microlenders are small community-based nonprofits with experience lending to individuals or small, local businesses. The SBA uses about 160 microlenders around the country as intermediaries to provide SBA loans to small businesses--and those lenders, who usually operate on an annual budget of $20 million to $25 million, recently got an incremental $50 million through the Recovery Act. But not all microlenders are funded by the SBA. Some receive funds from state or local governments, and also philanthropies. For an informative Q&A on microlending, go here .
If microlending sounds like something that may work for your startup, here's a rundown on what to do:
Bottom line, he maintains, "You have to be committed to your business to make it a success."
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