The Los Angeles City Council approved the formation of a revolving microloan fund program for small businesses last week. The movement was approved by a 13–0 vote and promises to give a total of $250,000 in loans annually for five years at amounts of $5,000-$50,000.
According to a city report, “It is estimated that every dollar loaned to a small business or microenterprise generates approximately two dollars of economic activity. As such, the Microloan Program could generate $2,500,000 in stimulus to the Los Angeles economy over the next five years.” These numbers are staggering.
They’re also indicative of an overall shift in lending culture towards microloans. While big banks shrug at the opportunity to help fund small business enterprises, forward-thinking lenders have jumped at the prospect of raising a new generation of business innovators. Microlending organizations come in all shapes and sizes – nonprofits, government agencies, and marketplace lenders, to name a few.
The Small Business Administration, for example, offers funding to many organizations who offer microloans. One such organization is Justine Petersen, one of three participating microloan intermediaries for the SBA in Missouri. In 2016, Justine Petersen loaned $13 million through 1,361 loans with money from an SBA program started by Congress in 1992 to help women, low-income, veteran, and minority entrepreneurs start businesses.
According to the SBA, the national average microloan is $13,849 and has an interest rate of 7.5%. These types of loans are community driven, operating on the idea that small business is always a good investment for community growth.
Greg Tucker, director of Missouri Small Business and Technology Development Centers, says microloans are a way for businesses with less-than-perfect credit to secure funding: “Microloans are for lower amounts, so there’s less risk, as a rule, and often less credit-worthiness required of the applicant.” Not only are microloans good for those with suboptimal credit, he says, they’re also “a good way to establish business credit.”
More and more business owners are saying that microloans are a crucial part of growing their businesses, and it’s looking like that will continue to be the case in 2018.