The San Diego Union-Tribune
By: Dean Calbreath
January 19, 2010
As little as $300 crucial lifeline for borrowers
At a time when the nation's biggest banks are keeping a tight rein on credit, community-based microlenders have been trying to fill the gap with low-value loans for mom-and-pop businesses and other entrepreneurs.
Although the loans are too tiny for most banks to handle -- ranging from as little as $300 to as much as $35,000 -- they can be an important lifeline for borrowers, who use the money to overcome short-term cash flow problems, create new businesses or expand their operations.
"The banks are still being tight with any business loans," said Jim Martin, who used a $35,000 microloan to launch a motorcycle shop in Santee. "I've got Triple-A credit, my credit score's in the high 700s, but I couldn't get any bank interested, even the one where I've had an account for years."
In contrast, Point Loma-based microlender CDC Small Business Finance not only made a loan to Martin and his wife, Janine, but also gave him advice about drafting a business plan, helping him make the shift from laid-off construction worker to entrepreneur.
"This has been a dream of mine since the 1980s, but without the CDC loan, we wouldn't have been able to do what we did," Martin said.
A study released last week by the nation's biggest microlender, Accion USA, shows that microloans have a ripple effect on the economy. Based on customer surveys, Accion estimated that each loan it generated in 2007 resulted in the creation or retention of 2.4 jobs, not including the loan applicant's own job.
The study, compiled with the assistance of the Aspen Institute, also showed that the small businesses, which typically have five or fewer employees, funded by the loans have had a better survival rate during the recession than their similarly sized peers. Accion estimated that 98 percent of its borrowers were still in business by year-end 2008, compared with 70 percent of similarly sized peers.
"With microenterprises accounting for nearly 18 percent of all U.S. employment, this study draws focus on the case for supporting microentrepreneurs with access to credit and training throughout the troubled economy," said Gina Harman, Accion USA's president.
Microlenders, which are typically nonprofits funded by big banks and government grants, have been around for about 15 years, with the goal of helping small businesses get off the ground or expand. Many of the lenders make only a couple of dozen loans a year or less, picking businesses that seem most likely to have a positive impact on their communities. But during the past year, there has been a jump in demand for their services, because credit has been so tight at big lenders.
CDC, which mainly handles Small Business Administration loans, typically makes about five or six microloans per year, according to Executive Director Robert Villareal. But last year, CDC extended 25 loans, including 22 at the maximum amount of $35,000. The loans went to restaurants, clothing boutiques, coffee bars and food markets, as well as Martin's motorcycle repair shop.
Martin, a 30-year construction veteran and former Motocross competitor, used to work part-time in his garage repairing motorcycles whenever the building industry slowed. But the CDC loan has helped him turn that into a full-time business, providing enough money to stock the store's shelves with parts and accessories before it opens this month.
Accion San Diego, an independent local affiliate of Accion USA, extended 120 loans worth more $1.1 million last year. That's down a bit from 2008, when Accion San Diego made 160 loans worth $1.7 million.
"There's a lot of demand, but the capacity of the applicants to repay the loans is sometimes not there," said Elizabeth Makee, Accion San Diego's executive director.
Makee said that sometimes all a borrower needs is a couple hundred dollars to buy new equipment or replenish supplies.
In 2006, for instance, Jeffrey Harding of San Diego launched Recycle San Diego, which recycles computers, TV sets and other electronics. Although his business was profitable, he couldn't expand it without spending more money for a truck and a better facility for the business, which was then operating out of his garage. But even before the recent credit crunch, he could not get a loan from a bank.
"When I applied for my first loan in 2007, I was a 24-year-old living alone with no collateral -- a really risky proposition for a bank," he said.
But since obtaining two $15,000 loans from CDC, Harding's business has grown into a five-person shop with a cadre of part-time helpers on the weekend. His sales have jumped from $96,000 in 2007 to $524,000 last year, despite the recession. He said he'll make the final payments on the Accion loans this year.
Even if banks are not lending directly to the borrowers like Harding, they are often lending indirectly, by extending grants and donations to the microlenders. Last year, for instance, CDC received a pair of $30,000 grants from Wells Fargo and Bank of America, $20,000 from U.S. Bank, $17,500 from Comerica, $14,000 from Citibank and $5,000 from Capital Source Bank. Last week, U.S. Bank loaned $44,000 to CDC to build its reserves.
"Supporting this program is one more way U.S. Bank is investing in the small business community," said Erica Opstad, who oversees the bank's community development in the region.
Accion also receives major funding from the banks, as well as government grants and community organizations, while the South County Economic Development Corp. -- whose tiny microlending operation typically makes one or two loans per year -- depends on a pool of money that has grown out of a federal grant.
"We tell people if you can get a grant, get one. And if you can't, we might refer you to the CDC or Accion, since we have some additional criteria on our loans," said Cindy Gompper-Graves, who heads the South County EDC.
Among other things, the EDC requires that borrowers provide specific details on how their loans will help create or retain jobs in the South County, with a general target of creating or maintaining one job for every $10,000 loaned.
Last month, the EDC loaned money to help a factory in Chula Vista bolster its production line and this month it's loaning money to a produce company to tide it over during seasonal fluctuations.
"The requests keep coming in," Gompper-Graves said. "And we keep trying to fill a niche for the business community."