iloan.jpgI’m of the opinion that many working stiffs day dream of someday working for themselves, but just don’t know how to fund even the smallest new venture. It’s a real concern, especially in this economy when banks are being tightfisted when it comes to lending.

Yesterday a reader named JT asked if I could offer some ideas about funding a small business. He wrote:

I’d start my own company, but with the recession and economic meltdown, I lost everything and my credit took a tremendous hit (face it, it just plain sucks). I cannot qualify for any loans to help get started and my family is in no position to help in that respect. Eve, maybe you could write about alternative sources of funding for someone who wants to start their own small company.

There are indeed sources that aren’t the regular lending cast of characters, and I’ve written about one good alternative, micro-lending, in the past. It may be a good option to check out for people like JT.

Microlending is filling that void for some, especially for those looking for 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:

- Figure out how much money you need and if you’ll be able to make payments on that loan monthly.

- Find a microlender in your town by talking to other business owners and business groups. You want to make sure these organizations are legitimate and not just fly-by-night storefronts. The SBA Web site’s microlending page offers a list of lenders around the country.

- It’s best to stay with microlenders in your geographic area, says Fred Tuffile, associate management professor and entrepreneurial expert at Bentley University.

- If you don’t have a business plan yet, you can use an SBA template.

- You may have to make a commitment to invest some of your own money in the business and put a home or car up for collateral. And you’ll also need a good credit rating. Small business lender Accion, for example, won’t lend to entrepreneurs who have a score that’s below 575, says Ana Hammock, the organization’s New England lending director.

- Make sure the covenants are not onerous. “You don’t want terms where the lender has to approve everything,” Tuffile explains. “You want to run your business the way you think it needs to be run.”

- Look for interest rates under 12 percent, adds Tuffile.

- Know your financial risks. “You have to weigh the pros and cons,” notes Tuffile. “If you can’t repay it, you put yourself in real risk of going into personal bankruptcy.”

Bottom line, he maintains, “You have to be committed to your business to make it a success.”

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