3 Things Every Microlender Wants to See in Your Small Business Microloan Application
Although you may not know it, there are hundreds and hundreds of non-profit organizations around the United States that make what are called microloans. Generally a microloan is a small business loan between $1,000 and $50,000.
Most microlenders are very different in nature than your traditional bank. Traditional banks want excellent personal credit scores, stable positive cash flow, and at least a couple years in business. Microlenders are different.
Here are 3 things that every microlender will look for in a loan application.
1. Strong Resume – A strong resume can go a long way with a microlender. To understand this you need to get inside the head of a microlender.
Most microlenders understand that they are working with very early stage businesses, and some decent percentage of them will fail. This means that the only way to hope to get their loan repaid is to bet on the individual borrower. So the lender is looking for a borrower that they think will be able to get a day job that will be able to pay back the loan even if the business fails. If your resume shows that you used to be a senior programmer for Google, and you left to start this business, the lender is going to assume that you will be able to get a job someday if needed.
2. Source of Income – Secondly, since most microloan applicants are still at a very early stage in their business, it is important to have a secondary source of income other than the business.
Often times an entrepreneur will have a spouse that takes one for the team and takes a day job to pay the bills for the home. This is important for the lender, because the lender does not want to put the business owner in a bad situation where they have to decide between making the loan payment and putting food on the table. So I encourage you to keep your day job as long as you can while you build your startup, it will make the lending process much easier.
3. Cash Flow Projections – Finally, a microlender will want to see a reasonable cash flow projection.
Make sure to build your cash flow projections assuming you got the loan. This means you should include a loan payment in your projections. Your cash flow projections will also help you know how much you need to ask for. If your cash balance never dips below $20,000, then you probably asked for too large of a loan. On the other hand, if your cash balance is hanging out around $500, you should probably ask for a larger loan.
As you are looking for a way to finance your new business, consider finding a local microlender to apply with. If you keep these three things in mind it may not be as impossible as you think.
Check out this
list of SBA microlenders here
About the Author
Adam Hoeksema is the Co-Founder of ProjectionHub which is a web application that helps entrepreneurs create a full set of financial projections without the need to have a Phd in spreadsheet modeling.