2009 Small Business Guide
small business
Small-business microlending on the rise

Faster processing

"It was fast, it was very convenient, and it was cost-effective," he says. Hutcheson declined to specify the amount of the loan but said it carried a 12-percent interest rate.

A process that took two weeks with the microlender would have taken about three months with a bank, he says. "And now with the credit crisis, it's even more difficult."

The return has far exceeded his interest payment, Hutcheson says. Smart Funding Solutions has picked up 25 new vendors from the campaign. "We might go back to them when we think about another marketing campaign," he says.

Microlenders report an increase in applications from small-business owners with high credit scores because banks have stopped lending, says Gina Harman, president of New York-based microlender ACCION USA.

"Credit scores for our applicants last year averaged 580," says Marvin Bryant, CEO of Atlanta Micro Fund. "Now it's about 615, and we expect it go up more toward the end of the year."

At the other end of the spectrum, Harman says an increasing number of applicants also are suffering from credit woes. "We're seeing people maxed out on their credit cards and additional debt."

More than 50 percent of entrepreneurs who complete applications for loans from the Greater Newark Business Development are loan-worthy, Quinn says. But it's only able to lend to about half of them.

This year it will lend more than $1 million, up from about $400,000 last year. "We'll try to meet as much demand as we can without becoming overextended because the technical assistance that we give is also an important component."

Importance of training

"Studies show that giving money only takes them (new businesses) so far," says Keith Weigelt, a strategy professor at the University of Pennsylvania's Wharton School. "It's important when people start a business that they have education."

Baumann says Wisconsin Women's Business Initiative Corp. makes sure its loan recipients have a thorough grasp on their human resources issues, costs, marketing, financing and sales.

At ACCION, "we work with some clients who might not have a cash-flow statement or tax forms," Harman says. "We offer business plan writing programs and marketing training."

With demand for microloans exceeding supply, this year's fiscal stimulus package earmarked an additional $30 million for the Small Business Administration's microloan program, which previously totaled $20 million.

The SBA will announce plans for creating more microloans during the summer, says agency spokesman Mike Stamler. The SBA program has produced loan volume of 2,100 to 2,300 in each of the past three years. Loans through the SBA program average about $13,000.

Lower default rate

Microloans started overseas as development tools in impoverished nations. Loans generally totaled $50 to $100, Weigelt says. But here, of course, the figures are larger.

As for untrained entrepreneurs seeking loans, some critics say the money would be better off spent on preparing them to work for large corporations.

"There is some validity to that argument," Weigelt says. But he says that the default rate for microloans is much lower than for traditional commercial bank loans.

"That's because (for low-income entrepreneurs taking microloans), you're not talking about bankruptcy (if the business fails), you're talking about going hungry."

Experts say that with the economy slow to recover and banks slow to resume lending, demand will keep growing for microloans. "I think this is very much the theme for 2009 and probably into 2010 as well," Baumann says. "The upside is that the banks might wake up to very good and competitive sources of alternative finance."

To be sure, the trend could ultimately reverse. "Once the credit markets are unfrozen and banks do more lending, then we'll probably see a drop-off in applicants," Bryant says. "At that point outreach will become more important for us."

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