By: Ylan Q. Mui
March 8, 2010
Ryan Fochler's life changed six years ago when he left his job in the computer industry to buy an Arlington County-based dog-walking business with $50,000 in personal savings and a home-equity line of credit. The firm grew quickly, with revenue more than doubling each year. By 2008, Fochler was ready to expand the business into a full-fledged pet day-care service called Dog Paws 'n Cat Claws.
The only problem was money.
Fochler wanted to convert an old drugstore into a 7,000-square-foot paradise for pets, complete with retail products and dog training. But those plans collided with the most severe financial crisis in a generation, and credit froze up. At one point, Fochler said, his bank refused to release the money needed to complete the construction.
"We just kind of hit it at completely the wrong time," he said. But, he added, for entrepreneurs, "failing is not an option."
To help plug the gap, Fochler turned to the Latino Economic Development Corp.'s nascent microlending program, part of a growing network of financial institutions that specialize in small loans to mom-and-pop operations that are often below banks' radar. The average size of the LEDC's loans is $10,000 at a 10 percent interest rate, said Lending Director Rob Vickers. Many banks will not consider loans less than $200,000, he said.
Microlending first became popular as a form of foreign investment in poor, emerging markets. Before joining the LEDC a few years ago, Vickers was a microlending specialist in Latin America for the World Bank, including financing projects in Nicaragua to help rural villagers connect to electrical grids. The trend has been slower to take off in the United States, especially because many consumers have access to credit cards and because lending requirements were lax.
But tightened underwriting standards have pushed many consumers out of the traditional banking system and sent them hunting for alternatives. In a survey of 16 microlenders by Opportunity Finance, a network of financial groups, 81 percent reported that applications for those small-dollar loans increased during the fourth quarter compared with the previous year.
"We're seeing a lot of demand from formerly banked businesses that are now looking to us to meet their needs," said Mark Pinsky, chief executive of Opportunity Finance.
In addition, the Internet has created a niche of microlending that allows businesses to appeal to everyday consumers for capital through peer-to-peer lending. Renaud Laplanche, chief executive of the Lending Club, said small businesses account for about 10 percent of loans made on his peer-lending site, with the average amount about $18,000. Laplanche said that demand has increased among small businesses but that individuals have also grown more cautious about whom they lend money to.
"It's not like if you can't get any loan from a bank, you can get it from Lending Club," he said. "The individual lenders are also savvy investors."
But Fochler said that even the staff members at the LEDC were surprised that he could not qualify for a bank loan when he approached them two years ago. He reported record sales each year, with growth rates averaging 170 percent. The pet day care is profitable. Fochler employs 25 people and recently added dog training to his services. But he said that after the financial crisis, banks not only wanted to see profitability, but also matching assets.
At the LEDC, Vickers said staff members consider not only standard criteria such as credit scores in approving loans but also the entrepreneur's ability to pay. The LEDC requires all applications to go through credit counseling to be approved and scrutinizes companies' balance sheets. And it helps borrowers separate personal expenses from business ones, typically a tangled web for small-business owners.
"We are obsessed with making good loans," Vickers said.
Still, the tough economy has taken a toll on LEDC loan holders. The repayment rate fell from 100 percent in fiscal 2007 to 92 percent in 2009, Vickers said. Nationally, 69 percent of microlenders reported an increase in the number of workouts with customers, according to the Opportunity Finance survey.
Vickers said that he expects the repayment rate to improve this year as the economy recovers and that the LEDC hopes to expand its program over time.
"We think growth is very important," he said. "There is unmet demand out there right now."