Microlending: Little loans that help a lot

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The Dallas Morning News (Texas)
By: Sheryl Jean
November 3, 2010

Michelle Matta had never heard of microfinancing before landing a microloan.After working for a promotional products company for eight years, she decided to branch out on her own. In 2007, she started A Turtle Loves Me, using her husband's nickname.

Six months later, she asked her bank of 20 years for a $25,000 loan to buy an embroidery machine. The bank turned her down because she hadn't been in business for three years, Matta said.

Undeterred, she approached microlender Accion, which lent her the $25,000 at 13.5 percent interest.

"I really thought this would be a company that I ran on my credit cards for a while," said Matta, 42, who dropped out of high school at 17. By end the end of 2007, sales totaled $233,000 and the home-based business was profitable. In the second year, her husband was able to quit his trucking job to work with her.

Since then, she has received two small loans from Accion Texas-Louisiana , which is based in San Antonio but has a Dallas office.

Microlending - lending small amounts of money to help people start or expand a business - is usually associated with developing countries. Such programs began in the 1970s to provide credit and banking services to the poor.

But microlending is on the rise in the United States, filling a void as banks have tightened credit in the last few years. It serves a crucial role in helping entrepreneurs, especially low- to moderate-income people and minorities, gain access to capital.

U.S. microlenders made 9,191 loans totaling $100.9 million in fiscal 2008, the latest data available from the Aspen Institute, a nonprofit research group. Most of them provide loans up to $35,000, with a third making larger loans.

The 360 U.S. microlenders include several in Dallas-Fort Worth.

U.S. microlenders have existed "below the radar" for a couple of decades, said Tammy Halevy, a senior vice president at the Association for Enterprise Opportunity in Washington, D.C.

Microlending is getting more attention now because of increased demand in a down economy and enhanced awareness, she said. (Bangladesh's Grameen Bank founder Muhammad Yunus won the 2006 Nobel Peace Prize).

"Business starts are increasing as more people are turning to entrepreneurship," Halevy said. "Traditional access to mainstream commercial banks is getting tighter. As people look for capital to start or grow a business and banks say no, more people are turning to nontraditional lenders."

Driving growth

Increased demand has prompted BCL of Texas to expand its current territory of Dallas, Tarrant and 10 other counties, said A.R. Ruiz, the North Texas director of business lending. The nonprofit makes loans up to $35,000 to existing businesses.

Since BCL began microlending in North Texas in April, it has made 11 loans totaling $431,250 through October. Borrowers have an average credit score of 680 (out of 850).

Accion Texas-Louisiana, the nation's largest microlender, said it made $2 million in loans in North Texas this year through Sept. 30 vs. $2.2 million a year ago. Of those loans, nearly 8 percent were overdue by 31 days or more, and the default rate was 5 percent.

"Our problem right now is not necessarily finding more customers; it's liquidity," said Accion Texas-Louisiana chief executive Janie Barrera, a former Catholic nun.

She plans to start a campaign to raise $7 million in a revolving capital fund (with a matching loan loss reserve funded from operations). Now, the nonprofit is funded by revenue from its $30 million loan portfolio and fundraising from the U.S. Treasury, foundations, banks and corporations.

Building credit

Microborrowers tend to have low credit scores and no credit histories, but many microlenders help them build credit and gain business skills to qualify for a loan.

The Plan Fund makes secured loans of up to $10,000 based on borrowers' cash flow and their ability to make payments. Since a borrower's typical credit score is 550, it relies on references, said executive director Anthony Pace.

Borrowers must pay a $35 annual membership fee, but they can get a free business plan from University of Texas at Dallas business students through a partnership, Pace said. And if borrowers take a business training class, they can earn an interest rate discount, he said.

The Plan Fund said it made 25 loans so far this year, with the average being $3,000. Accion helps its borrowers, who have an average credit score of 575 and median household income just under $35,000, build credit histories by providing financial literacy lessons and reporting borrowers' payment history with Accion to credit bureaus.

Accion's start-up clients must have a business plan, but a template is available on Accion's Web site for borrowers of less than $10,000. Start-ups also must provide collateral to secure a loan; Accion accepts car titles, accounts receivables, public contracts and restaurant equipment.

"The banks can't make these loans - they're regulated," Barrera said. "Often the banks are rejecting start-ups with too low profits or not enough real assets or collateral."

The future

Earlier this year, Matta was rejected by two banks for a loan to hire someone for A Turtle Loves Me. Accion gave her the loan in April.

Matta's sales are about $480,000 so far this year, up from $287,000 for all of 2009.

"I'm really hoping that one day, if we do well, we can invest with Accion and help other small businesses," she said.

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