Small Business Trends
By: Rieva Lesonsky
August 25, 2010
Once upon a time, microloans were primarily for entrepreneurs who lived in economically disadvantaged communities or were considered part of underserved populations. During the recession, however, microloans became an important resource for a wider range of entrepreneurs, many of whom are seeking the loans to supplement other capital sources or even to expand their businesses.
Statistics from the industry organization Opportunity Finance Network show that 56 percent of microfinance lenders received a greater number of loan applications this year.
Microloans are made by nonprofit organizations that are funded by the Small Business Administration (SBA); federal, state and local government agencies; or private donations. But the recession has put a crunch on microfinance organizations at the same time that more entrepreneurs are turning to them for help.
Even though they receive funds from other sources to lend to businesses, microlending organizations have to put up some of their own capital as a "loan loss reserve" in case loans go bad. With many organizations today lacking the funds to create this reserve, available microloan money is sitting unused.
Bank of America is taking steps to help. The bank has announced it will make $10 million in grants to help nonprofit lenders such as Community Development Financial Institutions (CDFIs) create the loss reserves they need to continue microlending to small and rural businesses. The grants could unleash as much as $100 million in low-cost financing for small business over the next 12 months.
"Even the smallest grant enables a CDFI to leverage as much as ten times that amount to lend to small businesses, which helps initiate a ripple effect impacting job growth, spending and overall economic expansion," said David Darnell, president of Global Commercial Banking, Bank of America, when announcing the move. "Bank of America is empowering these entrepreneurs by directing private sector capital to unlock exponentially greater amounts of federal dollars for their businesses."
Bank of America is already the nation's largest investor in CDFIs; it has made over $1 billion in loans and investments to 120 CDFIs in 37 states.
One microlending organization cited in a San Francisco Chronicle article surveyed 2,600 clients who received assistance between 2004 and 2008 and learned the clients had created 2,244 jobs at a cost of just over $4,000 per job. That, I'd say, is a pretty good return on investment.