Little Loans Go A Long Way

Kathy Stanley is surrounded by flocks of enthused children on a daily basis, and upon surveying Kidspace – the child enrichment center she co-owns and operates near Vancouver Mall – its apparent why her little clients are so energized.

Kidspace offers children a variety of services and choices, including the most perplexing – choosing which of the center's six play spaces to conquer.

Four years ago, this space operated as a less rambunctious family activity center. But this was before Stanley and her business partner Sharon Lascheck decided to transition into childcare, and before they happened upon a specialized microloan program that allowed them to retrofit their existing project with increased security and an invaluable playground.

"We did some research on resources available to childcare businesses, and we ran across Enterprise," Stanley said. "Their website highlighted childcare businesses as a focus area, which showed they might be supportive."

ShoreBank Enterprise Cascadia is a certified non-profit Community Development Financial Institution supporting "unbanked" communities in Oregon and Washington. In short, they provide microloans and services to entrepreneurs who typically can't secure capital.

Stanley is part of that niche. One the Small Business Administration coined "microenterprise" in 1991. Officially, the term defines a business with five or fewer employees that can benefit from a loan ranging from $500 to $35,000 and lacks access to conventional lending institutions due to a lack of operating history, established credit or collateral.

Rachel Brombaugh, Enterprise's Seattle lender, said the company has become a niche lender  specializing in loans ranging from $10,000 to $350,000 – averaging $240,000 – to established small businesses. She said these loans tend to carry higher interest rates by design because of the risk, and the costs of intensive management and technical support. These loans typically see a 3 to 5-year maturity depending on the circumstances and have anywhere from 8 to 12 percent interest based on risk.

"Truly, they were worth the extra percentage point or whatever it was," Stanley said. "They were always there for us, and made us feel like we were going to succeed no matter what. Our past experience with a traditional bank was that once you sign the papers, that's it – you're on your own."

Risk vs ROI

Risk is always an unavoidable product of the microfinance assumption that impoverished individuals have entrepreneurial skills, but lack access to reasonable capital. It's the same reason lenders such as Enterprise often have clear social and community development agendas and sustain a high level of involvement with their borrowers.

"We want to make loans that have an impact. It's not just the money for us," Brombaugh said. "We want to see positive results from our loans in areas of job growth, positive environmental and economic impact, and social equity."

These missions often vary from lender to lender, resulting in diverse program methods and designs. Mercy Corps Northwest – one of Enterprise's borrowers – centers its microcredit program on low-income, startup businesses. Their resources include classes and asset building programs for underserved demographic populations.

Mercy Corps Northwest lending manager Brian Fassett conducts small business courses for clients and feels the resources they offer are extremely valuable.

"The thing we're able to provide is a basket of resources, which include the business planning classes, one-on-one counseling and advisory services, and options for business service referrals," Fassett said. "Through these, we hope to help them model behaviors that will prepare them to apply for a loan at a bank or credit union."

Programs such as financial planning and group lending are utilized strategically to keep borrowers current on their loans and competent as business owners. This structuring also helps to manage the inherently high risk and to stem defaults, which were averaging a manageable 6 to 8 percent, as estimated by microlending groups, before the economy fell into recession.

Fassett says the high default rate reflects the fact that nearly 50 percent of their borrowers are startup businesses. Mercy Corps loans range from $500 to $50,000 – with an average amount of $10,000. Terms are up to 60 months and have a 12 percent interest rate. Still, Fassett finds that just as with Stanley at Kidspace, borrowers aren't afraid of the rates.

"With the increased demand we're experiencing, we're finding that we need to seek alternative ways to replenish the loan capital that we grant to borrowers," Fassett said.

This only solidifies the fact that demands for microlending has created an immense funding gap. The Obama administration's American Recovery and Reinvestment Act partly addresses this gap by allocating $30 million – enough to finance up to $50 million in new lending and $24 million in technical assistance grants to microlenders – to the Small Business Administration's microloan program. The Oregon SBA – responsible for loan management in Southwest Washington – received an allotment of $1.1 million to lend to small business owners and laid-off workers who want to start a business.

International microlenders set up shop in the U.S.

This trend is indicative as to why international microfinance institutions Kiva and Grameen Bank – typically known for working in developing nations – have established pilot programs here in the United States. These organizations perceive a large unmet demand, according to a study conducted by The Aspen Institute, an international nonprofit organization.

Historically, microfinance has been a lending method utilized in developing nations, but domestically microlending has been active and steadily growing for the past ten years. Experts say this trend has only accelerated since the economic slump.

"It seems, that with the tightening of traditional credit markets and closer scrutiny, the folks that would have been financed by a bank a couple of years ago aren't able to get bank credit," Fassett said. "With these circumstances, I would say we're probably going to see an increase in similar services."

Accion USA is the largest domestic microlender, with over $230 million lent since opening in 1991. In 2006, the organization established an Internet-based program that allowed them to offer applications in every state. Ana Hammock, program director for Accion's online portal, said this model allows them to cut some of the unusually high costs of physical locations, while dramatically expanding their reach. She noted Accion's lack of physical locations has downsides, but said they're still able to offer quality management and education services via the Internet.

"We're really cognitive of how many small business owners need access to capital," Hammock said, "So we're really trying to take on that mission."

In 2005, an admittedly conservative estimate by The Aspen Institute identified at least 20 million microenterprises in the United States. That accounted for 17 percent of all private employment, signaling that microlending isn't strictly a social boon, but also a boon to the economy as a whole.

"Microfinance is not the silver bullet," Hammock said. "It is however one important piece of ammunition to combat unemployment and increase family income. Our loans increase family income by 18 percent, strengthening not only individuals but also families, and the communities where their businesses thrive."

Economic Effects of Microenterprise In Washington

– There are 486,504 microenterprises in Washington, accounting for 17.4 percent of all employment in the state.

Share of employment by sector:

– Microenterprises employ 80,273 rural employees, which accounts for 20.6 percent

– Microenterprises employ 568,573 urban employees, which accounts for 17 percent

– Microenterprises represent 86.51 percent of all business in Washington.

– From 2002-2005, microenterprises increased by 13.49 percent; a total of 57,837 new businesses

Social Effects of Microlending In Washington

Agencies reported that:

– 50 percent of clients moved toward self-sufficiency by removing all forms of public assistance over 3 years

– Participant unemployment decreased 24 percent in the first year

– Household income increased 30 percent in the first year

Source: Washington State Microenterprise Association