Why Micro Loans Could Be The Answer to Many Small Business Owners Financing Needs

Small business owners, if you have never considered accessing a Micro Loan, you might want to take a look at this viable financing option. Some of you might think that these types of loans are used only in Third World countries. Perhaps you have heard of lending sites such as Kiva dot org, which primarily finances individuals living in countries other than the United States who are starting their own businesses.

Micro Loan financing is one of the best small business financing options available in today’s tight lending climate. This type of financing has been around for many years. Micro Lenders have finance entrepreneurs to the tune of billions of dollars worldwide. There are many other financing options available, but this type of financing has survived the recent financial storm and continues to grow exponentially.

To know if a this financing solution is a good fit for you, first, determine if a small loan amount is adequate for your business. Next, consider the criteria you must meet to be approved for the loan. There are many types of Micro Lenders and they all have different processes in place to either approve or decline your loan request

The answers to the questions below will help to determine if a Micro Loan is right for you:

  • Why should I use a Micro Loan? Large numbers of loan requests have continued to be approved since the financial crisis hit in 2008. Prior to the economic downturn, lenders would typically take two to three weeks to approve a loan request. Since 2010, traditional loan approvals have taken as long as 10 weeks or more. Many of these loans are now being approved in 6 to 8 weeks. This time-line is, of course, based on factors that must be taken into consideration on a per client basis.
  • Where do I access a Micro Loan? These loans are available through local, regional, national, and international sources. These sources have their own guidelines for approving loans. Some of these lenders are privately held “for-profit” companies, while others are nonprofit or not-for-profit organizations.
  • What do I need to access a Micro Loan? The lender will require such documents as your credit report, itemized Use of Funds list, cash flow statements, bank statements, and any other document the lender deems necessary for them to feel comfortable in approving your loan request.
  • How do I qualify for a Micro Loan? You will qualify for a loan based on the requirements of the Micro Loan lender you use. These lenders will request enough documentation, collateral, and other information to make them comfortable with the risk they are taking to loan you money.
  • Does my type of business fit this loan option? Each lender sets their industry specific requirements. You’ll need to determine if the source you’re working with will finance your type of business. If you don’t know your industry category, check the NAICS codes system or North American Industry Classification System at Census dot gov.

Many of you may have tried unsuccessfully to get loans from traditional financing sources such as banks. Perhaps your lender did not explain clearly why you failed to qualify for a business loan. Maybe you did not prepare well for traditional financing. For example, if your credit score was too low, or you didn’t have sufficient collateral to offset the risk associated with the loan amount you requested.

If this is the case, a Micro Loan could potentially improve your financial situation. This loan option is a great way to get your business moving quickly. You can access this type of financing based on a number of factors.

Factors to Consider for such a loan are:

  • Start-ups less than 2 years in business – $15,000 to $25,000 loans available
  • Seasoned businesses more than 2 years in business – $35,000 to $50,000 loans available
  • Loans use available collateral such as equipment, vehicles, jewelry, etc.
  • Loan approval time-line – 6 weeks to 10 weeks or more per lender
  • Some lenders lend nationwide, while others finance regionally or locally
  • Types of industries – All types included with restrictions in the construction and medical industries

If Micro-Loan financing fits your small business needs, then by all means use it to grow your business or help stabilize it. Remember, it’s a loan option you can use and reuse in shorter periods of time when compared to repaying a loan for a larger amount. Be sure to prepare effectively for this or any other financing option so you can qualify and get the working capital you need.

If you don’t know where to look for Micro Loan sources, check with your local area bank, Small Business Development Center, Women’s Business Center, Small Business Technical Center, local Chamber of Commerce, or a business consultant in your area.

Small Business Finance – SBIR Grants From the NSF

When we started our company in 2002, venture capital was scarce, so we sought alternative ways to finance the business. The Small Business Innovative Research (SBIR) program, specifically the one offered through the National Science Foundation (NSF), is high quality source of funding. I have personally worked on proposals that have won awards from the Department of Defense (DoD) and the NSF totaling over $2.1 million. I am also a business reviewer for Phase II proposals for the NSF. I have both been through the proposal process and the selection process.

The SBIR Program

The SBIR program was created in 1982 as part of the Small Business Innovation Development Act. Eleven Federal departments and agencies are required under this act to reserve a portion of their R&D funds to be awarded to small businesses each year.

To receive an award under this program, a company must be American-owned and independently operated, for-profit, and under 500 employees. Additionally, the principal researcher must be employed at least 51% of the time by the business. There is still some debate as to whether venture-backed companies qualify if the VCs own more than 50%. Speak with the program manager to determine your eligibility if you fall in this category. Each agency determines its own topics and amounts for the awards (within parameters). The websites for all the SBIR programs are listed on the DoD SBIR webpage.

The Latest NSF Solicitation

The NSF has a fairly comprehensive website that covers the submission guidelines. Your life will be easier if you review this site long before the submission deadline. The deadline for the spring 2008 round has passed, but start thinking now about your possible submissions for the fall. The solicitation for the spring has been posted and the proposal is due on June 10th at 5:00 pm. This is a hard deadline and they will give you no leeway if you miss it. Each company may submit up to four proposals in one round.

The topics for this round include Biotech and Chemical Technologies, Software and Services, and Electronics, Components, and Engineering Systems.

The Phase I will be for no more than $100,000. You are usually notified four to six months after the proposal has been submitted. If you should win this grant, you will begin the grant period in late 2008 or early 2009. You get 2/3 of the money up front and 1/3 at the end. After six months of research, should you find success, you may apply for a Phase II grant up to $500,000. Again, you may apply in either January or July following the completion and, if successful, you will receive your funds in another six months: 25% up front, 15% at the end, and 20% three times during the course of the project. A Phase II is usually 24 months. Please note, that for the first year, you are spreading a small amount of money over a pretty long period. This is useful for funding some of your development with non-dilutive funds, but not particularly useful at providing working capital.

Winning Your Phase I

  1. Understand the solicitation topic: they are very serious about sticking to the topics. The topics for this round are fairly broad, but if you have an advanced material that decreases the wind resistance on airplane, it doesn’t matter how fabulous it is, you will have to wait until the Advanced Materials solicitation. Call the program officer and find out if they are interested before you do all the work on the proposal.
  2. Have an innovative technology. They are not interesting in funding improvements. Additionally, the proposal is reviewed by someone who really understands the technology. Don’t skimp on technical details because you assume the reader can’t understand it. If the program manager doesn’t understand what you are doing, they will find someone who does. You will not be successful if they don’t have the information necessary to understand what you are attempting to do.
  3. Have a good commercialization plan. In Phase I, they are not expecting an extensive business plan, with a full marketing campaign defined. They are, however, going to expect you to have a good understanding of who might buy this product, why they would want to buy it, and what they might be willing to spend for it. They will also expect that the market be at least large enough to support your company as a commercial venture. And never, never say “there isn’t a market yet for my product because it’s so innovative” or “there are no competitors for my product.” When the car was invented, the market was everyone who owned a horse and wagon. Competitors were everything that could move a person from one spot to another.
  4. Provide letters of support. It is actually a requirement for this solicitation, but even when it is not a requirement, it’s a really good idea. Good letters of support come from representatives of companies that will be interested in buying your product. In the best case, they will say that they will buy it, if you are successful. Often the easiest thing to do is write the letter yourself and ask the representative to copy it onto his or her company letterhead and sign it. If you include multiple letters, don’t provide the same copy to every supporter – it makes you look like an idiot.
  5. Call the program officer well before the due date. Okay, I said this before, but it bears repeating in case you missed it. The program managers whom I have met are intelligent, dedicated people. They are very excited about these technologies and knowledgeable in their areas of expertise. They can be very helpful in developing your proposal. That being said, don’t pester them on little details, they are also very overworked. It’s probably a good idea to call sooner rather than later.
  6. Let someone else read your proposal before you submit it. That someone should have a very strong command of the English language and should be able to let you know if the proposal reads well, presents the ideas clearly, and has perfect spelling and grammar. Also, don’t be clever in your presentation of the document. Times New Roman, 12 point, is the font of choice for newspapers, books and magazines for a reason – it’s easy on the eyes. Don’t make your reviewer’s job harder than it needs to be.

Some Technical Notes

  1. You are required to submit your proposal through FastLane. Sign up with FastLane and start using it right away. It’s pretty easy once you get used to it, but occasionally there are technical glitches and they will happen to you if you wait until the last minute.
  2. Get a DUNS number right away if you don’t have one. Call Dun and Bradstreet at (800) 333-0505 or find them online at http://www.dnb.com/us/. You will need a DUNS number to sign up with FastLane.

Winning Your Phase II

There is no official solicitation for a Phase II. If you have completed your Phase I NSF SBIR, you are eligible to apply for a Phase II grant. You may apply either the two following cycles, meaning if you completed your Phase I in December, you may apply either by January 31st or July 31st. The website has general Phase II proposal instructions.

Should You Apply?

When we are going through the proposals, they may be rejected for many reasons. Mostly proposals are rejected because they do not meet the technical or commercial hurdles required for a Phase II grant. That being said, we periodically hit a proposal that is rejected for other reasons that could have saved the company and the grant committee a lot of time.

If you did not get any positive results from Phase I, don’t bother to submit a Phase II proposal. We occasionally see companies who say basically, “my idea for Phase I didn’t pan out, but I have another idea on how to make this work, so I am submitting for support of that idea.” That is another Phase I proposal. It gets immediately labeled as such and put in the rejection pile. Don’t bother to submit that as a Phase II proposal.

If you are not confident of your results, check with your program manager. They should be willing to suggest areas that need shoring up and also should let you know if they don’t believe a Phase II proposal will get funded.

Writing Your Phase II Proposal

The number one reason why proposals get rejected is technical. The technical review team is made up of scientists and engineers in the field of study of the solicitation. The program managers have selected a panel that has deep knowledge in your area of research. They expect the technical portion of the proposal to look like any other grant, meaning they expect all the technical information needed to make a decision on the technology, backed up by references. I have heard many times on the panel, “Well, this looks interesting, but I don’t have enough information to determine whether it is feasible.”

If you have never been a university scientist, it behooves you to find one in your area of expertise and ask them to review your technical proposal before you submit it. The technical reviewers are extremely brutal and are unwilling to compromise their review standards.

The second reason, and much lower on the weighting scale, is the commercial section. I have seen a technology where the technical reviewers rave about in its innovativeness and brilliance, but the commercial reviewers can’t see a market at all, and the project gets funded. I have never seen a great business plan, with a mediocre technology, get funded.

The business plan is important though. Should your proposal be placed next to another with a similar quality of technology, the commercialization section can carry the day.

Your plan should clearly define the steps that your company will take to get from R&D to revenues. If you need to build a beta tool after the prototype has been completed, you should have a clear definition as to how you will fund it. Just so you know, everyone says, “we will raise venture capital.” Raising venture capital is easier said than done. If you are going to say that, make sure that you have some venture capitalists review your technology and write letters of support. Also, have alternative plans in case the VCs don’t drop money in your lap.

Also, a lot of proposals say things like, “We will partner with Honeywell to manufacture our first project. Five years later, we will have $50 million in revenue.” It seems that people put a lot of thought into getting the first product completed and are good at imagining what will happen in five years, but they seem to skip the whole process in between – which by the way, is the hard part.

Another commercialization issue is the lack of any business experience in the management team. If you can’t afford to hire some one, find some business advisers (and listen to them). You can start with your local S.C.O.R.E. office.

Finally, have someone read over your proposal. It should be written clearly, with no grammar or spelling mistakes. If you can’t find business advisers or someone to read your proposal, why would someone want to give (yes, give) you $600,000.

Click here to visit the NSF SBIR website. Good luck.

Financing for a Small Business

There are many different ways that you can obtain financing for a small business. Most entrepreneurs initially go to a bank in order to receive the capital that they need in order to launch or expand a business. However, given the current credit market environment, many small business owners have had significant trouble as it relates to obtaining the money that they need from lending institutions. As such, one of the most popular alternatives to using a bank loan to start a business is to work with private investors. However, it is should be noted that these investors will require a significant amount of equity as it relates to providing capital to your business.

If you are a company that is already in operation then it may be in your best interest to first work with a lending institution as having a proven track record can ameliorate a vast majority of the risks associated with paying interest and principal back on a monthly basis. This is especially true if you have a significant amount of built up equity in your business. It should be noted that most banks and financial institutions are going to want to see a tremendous amount of tangible assets as it relates to your business. There is always going to be a need for collateral when you are working with a traditional financial institution.

When you are working with a private investor the most important issue to note is that your business must be economically viable. If your business does not or will not produce a profit that will sustain a 20% year on year return on investment then you may find that you are going to have significant trouble finding investors that are willing to put capital into your business. This is primarily due to the fact that the risks associated with small business investing is extremely high. As such, you should focus on how you intend to manage risk if you take capital from an angel investor or other type of private funding source.

The final methodology of financing a small business is to use your existing lines of credit. This may include credit cards and home equity loans that come with a low to moderate interest rate. Many of the best small businesses were started this way, and although the personal financial risk is high, this type of financing may come with far fewer expenses. We are going to continue to discuss creative ways that you can finance your business on an ongoing basis as it relates to getting capital for your new or ongoing venture.