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Micro-loans help smallest, neediest startups grow

Micro-loans help small startupsRoland 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 self-employed."

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 in town."

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Micro-enterprise comes to America
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 financial assistance.

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 the Foundation for International Community Assistance (FINCA) face the unusual challenge of translating what worked in the Third World into an American context.

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 capital.

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 online. Count 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 businesses.

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."

Jay MacDonald is a contributing editor based in Florida

 

--Posted: Oct. 13, 2000

 

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See Also
What to expect when looking for a micro-loan
Holy bankroll! Churches now loaning to startups (10/12/00)
Local lenders can help you start your business (9/29/00)
Minority businesses still face capital gap (9/27/00)
Borrowing from friends and family -- without the feud (7/24/00)

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