Micro-loans help smallest, neediest
Espinoza was in a jam.
The residential heating and cooling business
he inherited from his father needed commercial accounts to survive.
There were plenty of them available in the Little Village neighborhood
of Chicago, but because they didn't pay until the job was completed,
it required cash upfront to invest in labor and materials -- cash
Roland didn't have.
Espinoza appealed to local banks but was unwilling
to put his house up as collateral.
"If something happened to me, my family would
be left with nothing," he says. "That's one of the pitfalls of being
Then he heard about ACCION
International, a leader in the growing micro-finance industry.
He applied to ACCION Chicago and was quickly approved for a $10,000
micro-loan. It allowed him to break into commercial contract work.
"I was always worrying, constant worrying,"
he recalls. "Now, when I get the final check, I don't owe everyone
Micro-enterprise comes to
Micro-creditors are an often overlooked source of capital for the
very smallest of businesses, filling the growing need for small
business loans that banks and other lending institutions won't touch.
According to the Association
for Enterprise Opportunity, a trade association representing
some 450 micro-enterprise organizations, a micro-loan is $25,000
or less made to a company with five or fewer employees. The industry
average micro-loan is $12,000.
The concept started in the poorest Third World
countries, principally Bangladesh, and spread quickly where it was
most needed, in Eastern Europe and Central and South America. The
United Nations considers the movement a critical tool to fight world
poverty. At the 1997 Micro-credit Summit in Washington, D.C., the
conference launched a nine-year campaign to reach 100 million of
the world's poorest families with micro-enterprise training and
The growing number of U.S. immigrants and the
expansion of self-employment that began with the woman's movement
of the '60s and '70s has created a market for micro-enterprise programs
stateside during the past decade. Organizations such as ACCION and
for International Community Assistance (FINCA) face the unusual
challenge of translating what worked in the Third World into an
According to an ACCION study, there are an
estimated 13.1 million micro-entrepreneurs in this country, including
2.4 million African-Americans and Hispanics. Of those, an estimated
10.8 million, or 82 percent, have never received a business loan
from a bank. Many of them won't even consider a bank loan due to
bad or nonexistent credit, lack of collateral, youth, race or the
small size of the loan they need.
"In many cases, we may be the only avenue available
for loan capital," according to Livingston Parsons III, vice president
of lending operations for ACCION. "Their only other options may
be borrowing from friends and family, credit cards with high rates
and fees, or loan sharks who charge upwards of 5 percent to 10 percent
a day in interest rates."
It's more than money
Helping low- to moderate-income people succeed is the bottom line
of the micro-enterprise industry, according to Bill Edwards, executive
director of the Association for Enterprise Opportunity.
Most of the industry's 600 to 700 micro-lenders
are nonprofit community development organizations that depend heavily
on federal, state and local grants, along with donations from private
philanthropy, including religious, minority and women's groups.
"Our studies indicate that micro-enterprise
returns $4 for every $1 of public money," says Edwards. "There is
a perception that the most important thing we do is lending capital.
That may be. But what our members have found is that the education,
the training, the technical skills and the assistance with the operation
of an enterprise are equally important. If you measure the bottom
line qualitatively, the impact is solid."
In the United States, micro-enterprises hold
a precarious place in the financial world. They receive a good deal
of assistance from the federal government; the Small
Business Administration is their single largest source of funding.
They, in turn, dole out micro-loans to people who either cannot
qualify for a traditional SBA loan, eschew the legendary SBA paperwork
or simply can't afford to wait that long for the money.
"I can't tell you how many people I've talked
to who went to the SBA and their frustration level at the end is
terrific," says Parsons. "You need the money now and they're talking
about a four- to six-month process. Our goal is to turn around a
loan in 14 days."
Their relationship with banking is equally precarious.
Most banks want no part of writing micro-loans; they cost just as
much to process as larger loans, with little return. But banks would
like to see more customers for their products and services from
the ranks served by micro-lenders. As a result, banks play an important
role in micro-enterprise by selling money to the micro-lenders,
often at or below market rates, as a way to meet their obligations
under the Community Reinvestment Act, and perhaps seed some future
customers, as well.
"I've never met a banker anywhere who felt
that the need was not there," says Edwards. "A lot of them express
regret that they can't do more."
(One bright spot of bank consolidation: laid-off
bankers are increasingly finding their way into micro-enterprise
organizations, where their lending savvy is greatly welcome.)
Keeping all the good intentions flowing in
the right direction are national organizations such as the Coalition
of Community Development Financial Institutions and the National
Community Capital Association. Both serve as clearinghouses
of information for micro-enterprises about the industry, from membership
directories to advice on best practices to where to borrow loan
One loan at a time
The nascent micro-enterprise industry faces difficult challenges
in meeting the needs of American micro-entrepreneurs. In the Third
World, $100 can make a dream come true; here, it won't last through
a John Tesh concert. Staffing costs are higher, office space pricier,
other sources of capital (especially plastic) more plentiful --
and unlike the barrios of Rio or La Paz, America's low-income entrepreneurs
are spread across a continent.
To help cut costs and leverage what little
money is available for marketing, some micro-lenders have gone heavily
Me In is one such online micro-creditor offering fixed-rate
loans of $500 to $10,000 at 2 points above prime with terms of 12
months to 84 months. The loans are aimed at women-owned startup
Others, such as ACCION, cut processing time
and paperwork by writing group loans, in which three to five borrowers
apply together and agree to guarantee each other's portions of the
loan. Parsons estimates as much as 20 percent of ACCION's U.S. loans
are group loans.
Edwards says the micro-enterprise industry
is experiencing growing pains now, but is likely to double in size
during the next decade.
"This is a very recent phenomenon," he says.
"There are a lot of people out there who don't have a lot of experience
in doing this. This whole field is arguably only 10 to 15 years
old. Our own organization is only in its 11th year. And the first
loan is the hardest. It's a very steep learning curve, but I see
progress being made."
is a contributing editor based in Florida
--Posted: Oct. 13, 2000