Microloans meeting credit needs for entrepreneurs
Thursday, August 9, 2012
MIAMI -- Do an Internet search for microcredit, and images of colorfully dressed women in Africa, South Asia and Central America pop up. But the international trend that began more than three decades ago in Bangladesh is increasingly finding a home in the United States.
In cities like Miami, New York, Houston and Los Angeles, a small but growing group of mostly immigrant and minority entrepreneurs are turning to microfinancing. These loans, generally provided by not-for-profit groups, can serve as steppingstones to more traditional sources of credit and are often the difference between success and failure for small business owners who may have nowhere else to turn for the money they need to build a business.
"You know this ‘Buy Local' movement? There's starting to be this ‘Lend Local' movement," said Premal Shaw, president of the not-for-profit Kiva, which allows individual donors to select a micro entrepreneur online, a process he likens to Match.com meets microfinance.
For smaller startups, especially those owned by minorities, it can be tough to get the financing needed to expand and grow a business. Just under a quarter of nonminority firms whose total revenue was less than $500,000 received loans, compared to 17 percent of minority firms, according to government figures. Making things worse, banks have become pickier about who they lend to since the financial crisis began in 2008.
Activity among microlenders, however, has been gaining steam. The number of microloans disbursed increased 25 percent between 2008 and 2010, according to a study by Washington, D.C.-based think tank The Aspen Institute's FIELD program. Women entrepreneurs are the most likely to turn to microloans.
Lynette Tyner was a struggling African American fashion designer from New York. She used $10,000 in loans from not-for-profit microlender Accion to buy machinery and open a studio and retail store to sell her denim outfits and bags. She now sells her designs online and through New York wholesalers.
More than money
For some microlenders, the relationship with the entrepreneurs goes beyond the loan. Financial literacy classes, mentoring and other training is often part of the program.
"I was able to meet some great people and get priceless advice for my business like the editor-in-chief of Glamour Magazine and the CFO of Ralph Lauren," Tyner said of the additional support Accion provided. She even got to attend a workshop with fashion designer Tory Burch.
Microloans tend to range from $500 to $10,000, but can be as much as $50,000, with interest rates varying from 3 percent to 18 percent. Loans usually are repaid within six months to several years, and often they go to businesses that employ just one or two people. Requirements differ, but credit standards tend to be lower than those of banks and other financial institutions, and the loans are processed quickly. Individual donors who lend to entrepreneurs on Kiva don't earn interest, or profit, from the loans.
Going through traditional channels is difficult, if not impossible, for many small entrepreneurs. The U.S. Small Business Administration guarantees loans averaging around $330,000. It has a small microloan component, but even there, loans average about $13,000. It doesn't make much financial sense for banks to spend time with clients seeking much smaller loans, says Paul Quintero, CEO of the international microfinance not-for-profit Accion East, but he says that's where organizations like his can step in as intermediaries by bundling the credit. One challenge is that many people who could use these loans don't know about them. Quintero would like to see banks that turn down loan requests provide information about microlending alternatives.
Margarita Briones worked for decades in restaurants and other jobs before striking out on her own with a flower stand across from the Miami Marlins stadium in Little Havana. Five years ago she got her first microloan from Miami-based OUR Microlending to expand her selection and improve the shade that protects her cart from South Florida's sun.
"Sometimes I earn a little, sometimes a lot, but I'd rather be out here in the sun, my own boss," she said. "I am very grateful that they helped me do that."
Her children thought the loan offer was a scam, but the Nicaraguan immigrant had tried to take out bank loans to no avail and pressed on. She repaid her $3,300 loan plus interest within a year and has taken out three more.
Things worked out for Briones, but her children's worries weren't unprecedented. The microfinance industry isn't without some controversy. The total number of active microloan accounts fell 22 percent in India after that country's largest microfinance market, Andhra Pradesh, blamed a spate of suicides in late 2010 on aggressive lending and collection tactics by lenders. To date, the kinds of problems experienced in India haven't emerged in the U.S.
Getting even small loans is tough for the growing number of Americans facing foreclosure or who have otherwise seen their credit suffer in the weak economy.
John Giraldo and his wife Francy Bedoya were in that group. In 2008, they began selling brightly colored smartphone cases wholesale. The Colombian-born couple initially worked out of their garage before renting a small office and warehouse. To expand they needed cash, but Giraldo's credit rating was dismal following a foreclosure.
"The banks wanted us to show our business had been running for at least two years before we could get a loan," he said. "We couldn't do that, and with my credit shot, we had no chance."
Through a friend, they heard about the OUR Microlending program. Francy Bedoya received five loans for more than $9,000 to expand inventory and later to rent a larger office.
The company, Movil Wireless, now ships throughout South Florida and to a handful of other cities across the country and to Colombia. The couple is currently looking for a larger bank loan to further expand their merchandise and offices.
An estimated 20 million microenterprises exist in the U.S., according to The Aspen Institute's FIELD program. The think tank puts the number of annual microloans in this country at more than 17,000. Getting the loans can make a significant difference in the entrepreneurs' lives. A 2008 survey by the institute found the average household income of families participating in a microenterprise program rose 20 percent to $36,000.
The OUR Microlending program used by Bedoya is among the rare for-profit groups. Former Venezuelan banking executive and CEO Emilio Santandreu said he believes a "good and successful business model can be built upon socially responsible lending." His company's loans have interest rates ranging between 15 and 18 percent but don't require credit checks. His sales representatives get personal references and determine whether the borrower's business plan is strong enough that the loan will likely be repaid.
His experience shows the need for lenders interested in this market to be careful. Since 2008, his company has provided $6 million in loans, averaging about $5,000 each, to more than 1,000 clients, but it has yet to make a profit. The first year, 20 percent of the loans weren't repaid. Now, the default rate is closer to 5 percent, he said, adding, "We paid a high price for our learning curve."
Follow Laura Wides-Munoz on twitter: (at)lwmunoz. Joyce M. Rosenberg will return next week.