Small business is the heartbeat of the American economy. In 2019, 30.7 million companies categorized themselves as small businesses with less than 500 employees. Today, the number of female-owned and operated businesses is greater than ever before. The barriers to entry have loosened as technology has made it easier to reach new target markets.
But some of the most profitable businesses have been birthed with some capital, whether it was cash from a severance check or a small family loan. Don’t underestimate the power of a small loan. In fact, micro-lending is widely-used amongst many third world countries, and economists have found that it is key to keeping their economies afloat and healthy. Microlending is a term coined by economist cum professor Muhammed Yunus from Bangladesh, who gave small loans to very poor families in India. These were people who couldn’t just ask their local financial institutions for a loan due to socio-political limitations but were in desperate need of small funding to keep their small agricultural and farming businesses running, which in turn fed their families.
Yunus believed in these individuals and often made loans to them at little to no interest and they always paid him back in full and on time. He eventually developed his practices into the Grameen Bank and ended up winning a Nobel Peace Prize in 2006 based on this very theory. Today, the idea of microlending has evolved to fit many impoverished communities around the world because it’s low risk but makes a huge impact.
Last year, I asked a private investor for a small microloan of $500 to produce my yearly magazine. I didn’t think I could just walk into a fancy bank on Fifth Avenue but I knew this loan would help my business in the long run. I wrote this person a short proposal detailing what I intended to do with the funds, breaking down the production fees, and projected profit from my literary project. I buttoned it up with fancy fonts and headers on a presentation and within 24 hours this person responded saying they would support the project.
The loan was only $500 but it meant everything to my business. Not only was I able to produce and distribute this literary project to over 200 readers, but I was also able to pay three creatives a token of my appreciation for their submissions. Although traditional microlending means you have to pay back the funds at some point, the terms of this contract stated that I didn’t have to pay back the loan if I made the projected profit at the deadline I outlined in the proposal. Of course, I exceeded expectations.
The beauty of microfinancing is that it can be customized to fit the needs of both parties. The crux of it is to rely on the trust of peer-to-peer lending and transactions that have the power to help someone at arm’s length. Which is why many underserved communities have found microlending successful. There are private investors or individuals who seek out ways to help the next generation of small businesses with forward-thinking financial terms that don’t harm and nor hinder businesses located in communities of color.
Although my experience with microlending is unique, there are thousands of stories of how microlending has been influential in helping global communities, especially those who are struggling to keep up with technology and the changing landscape of how we do business as a society. In fact, governmental relief funds due to COVID have rolled out the “Paycheck Protection Program” for small businesses, freelancers, and entrepreneurs, using a series of guidelines that provide instant small microloans at no interest at a time where the unemployment rate is over 10 percent. Here are 3 advantages and disadvantages of tapping into micro-lending and other financial lending resources as a small business.
Unpredictable Inventory:
As a small business, inventory is always an ever-changing variable. Too much inventory can be a burden, but not enough inventory is worse. If you are struggling to produce goods, but have awesome customers that continuously support you, consider applying for a small loan. These loans can be obtained from a bank or other platforms like Square or Paypal. But beware of high-interest rates!
Delayed Payments Terms:
As a freelance writer, I struggled with getting paid on time due to unreasonable payment terms set forth by the conglomerate publishers I used to write for and there was no way around them. Sometimes payment was net 60 or 75 (days) and these terms often made me late on rent and bills. I often budgeted for two to three months at a time just to account for the dramatic difference on my income hitting my bank account. Sadly, this is nothing compared to what many mom and pop businesses have to endure working with many fortune 500 companies. I can go on and on about the inequalities of the production chain, but one of the most identifiable risks of working with companies who are “bigger” than you are the payment terms. More often than not, being a supplier of something basic like tissue paper and maybe owning a factory can be challenging when your customers are first-world businesses with uncompromising payment terms. For this reason, you may consider micro-financing with a small bank or private investors just to make ends meet.
The disadvantages of relying on small loans are that you’ll fall into a cycle of never being able to see the whole fruits of your labor because you’ll always need a loan. Currently, there are companies that give next day loans but beware of using microlending as a bandaid. The key is making sure your business is aligned with payment terms that meet your needs.
Growing Pains:
If your business is ready to take on more employees or looking to upgrade its infrastructure, this could increase productivity and revenue-driven opportunities. The idea of microlending has evolved to not only include cash loans but a means to quickly gain access to expensive equipment and technology. When I worked with a family-owned dry cleaning company, I was tasked with updating and recommending the technology that would help the business grow in a way that would retain old and new customers.
There were only a few programs specific to the dry cleaning industry, but it came at a hefty price tag. I don’t remember the exact number, but the annual licensing fees for this one particular program consisted of $30K in upfront costs. Meanwhile, this company’s cash flow was so volatile, there was no way a bank would want to lend out any amount of money. The disadvantage of micro-lending is that it only works for companies already in good financial standing. The nature of microlending is little to no interest rates and it’s based on trust and investment into the company. Of course, a microloan would have maybe helped this company gain access to this technology, but microloans are just a facelift.
