By: Tanya Mannes
September 20, 2010
Program more popular than ever during era of tight banking credit
Kimberly Frye's auto repair shop in Ramona was struggling with fewer customers as the economy tanked in 2008. To be competitive, she knew that she needed to stay open longer and add services for low- income clients, but the banks she approached weren't willing to lend her money to hire employees and get through the transition period.
Frye eventually learned about the Small Business Administration's increasingly popular "microloan" program for small and startup businesses. The $35,000 loan she obtained allowed Dave's Auto Truck & RV Service to open on Saturdays, and gave it a cash cushion so it could accept state vouchers for smog repairs.
"I'm proud of what we've done," Frye said. "I was able to sign the documents knowing that I would have some working capital for the next six months. I knew in my heart that it would get me through the transition."
The Microloan Program provides small, short-term loans to small businesses that would not qualify under conventional lending practices because of their short time in business, the small loan amount requested, or credit problems. SBA lends money at a low rate to specially designated intermediary lenders, which are nonprofit community-based organizations that deal directly with borrowers. The maximum loan amount is $35,000.
The SBA is making more microloans than at any point in the program's 19-year history, officials say, with high demand from businesses that have been turned down by the banks.
The concept of microlending is more typically associated with very small loans -- as little as $25 -- to poor people in developing countries. In the United States, the SBA dominates the microloan market, with loans averaging $13,000. There are also nonprofits in the private sector, such as ACCION San Diego, Kiva and the International Rescue Committee, that issue smaller loans without federal backing.
The American Recovery and Reinvestment Act, which was signed into law in February 2009 to create jobs and promote spending, included $50 million for microloans to small businesses.
In San Diego and Imperial counties, the volume of loans increased by nearly 50 percent after the stimulus bill was enacted in early 2009. Pending federal legislation known as the Small Business Jobs Act, which would extend funding for some stimulus programs, would increase the maximum microloan amount to $50,000.
In San Diego, microloans are issued through CDC Small Business Finance. The nonprofit company used to make three to five loans per year, but in the past year has issued 22.
"The SBA Microloan Program has proved to be critical in today's tough lending environment," said Susan Lamping, senior community loan officer at CDC Small Business Finance. "As the economy tightened up and the big banks stopped doing these smaller, credit-based loans, we stepped in to meet that need."
Lamping said her organization works closely with entrepreneurs to evaluate their business plan and cash flow. Loan officers look at a business owner's personal credit score and assets, and often require a co-signer on the loan.
"We make loans to people we believe in," Lamping said, "even when there are some weaknesses in their loan request."
Frye said her microloan, which came through in November, has injected new life into her business, with at least 12 vehicles coming in for repairs each Saturday. She has four full-time technicians, up from two.
She is especially proud that she is the only shop within a 50-mile radius in the state's Gold Shield program, allowing it to offer the full range of smog services and providing vouchers of up to $500 for low-income clients. Having a cash cushion was critical because the state takes eight or nine weeks to issue reimbursements for the vouchers, she said.
"We have exemplary standards in repair quality, and the state had approached us about being a Gold Shield shop," she said. "The only gray area for us was going to be the financial hardship of carrying the repairs."
The microloan has an interest rate of 7.75 percent, and Frye is paying it off over five years.
"It was the best decision that I could have ever made," Frye said. "Being a single woman, a single mom in business, they saved me."
Eventually, Frye hopes to qualify for a larger loan to renovate the auto shop, which is housed in two rusty 1950s Quonset huts.
In other cases, microloans have helped people purchase existing businesses or start new ones.
Dan and Joe Gram, who are brothers in their 20s, have years of experience in fitness, gymnastics and coaching, and they decided to go into business together. They learned about an opportunity to purchase an elite gymnastics training center on Miramar Road in San Diego from a nonprofit parents group.
They raised $15,000 from family and friends, but they needed an additional $30,000 to take over the business and its 10 employees.
Joe said that they visited at least six banks without success. "We got passed from one bank to another," he said. "Eventually, someone said: 'Go talk to Susan Lamping at CDC Small Business.'"
They applied for the loan in October, with help from a family member who agreed to cosign. They had the check by May and took over right away.
Their business, the San Diego UNITED Training Center, offers instruction in gymnastics -- including a hard-to-find boys' team -- along with dance and cheerleading and other sports. The majority of income is from clients' monthly tuition, which generally ranges from $65 to $120 depending on the number of hours per week.
"So far, so good," Joe said. "We're pretty much break-even, moving toward profitability. We're learning a lot as we go, being young entrepreneurs."