Nonprofit
microlenders at crossroads after two decades in U.S.
By John Pain
The Associated Press
Posted May 31 2005
MIAMI · One bank told Jay
Rice his credit score was "garbage" when he tried to get a loan to
start a landscaping business from his home in a run-down section of Miami.
Fidel Albelo thought he'd do better when he wanted funding to expand his print
shop because he had his personal accounts for more than a decade with his bank.
He also got turned down -- because his credit history wasn't established long
enough.
Both men were losing hope for their entrepreneurial dreams until they got
lifelines from a microlender, a company that specializes in making small loans
to businesses who are rejected by banks and other traditional lenders because of
poor credit.
"I would endorse them over any bank. I would endorse them over any
financial institution. I would endorse them over any government minority
business program," said Rice, who got a $4,000 loan at about 12 percent
interest.
Microlenders have been giving small businesses loans of less than $35,000 for
about 20 years in the United States in an attempt to help people out of poverty.
They focus on businesses with five or fewer employees.
These nonprofit groups are becoming more popular, but they are at crossroads.
The money that they lend comes from government grants and foundations, whose
generosity ebbs and flows with the health of the economy. And they don't have
enough customers to be self-sufficient.
They are also facing growing competition from banks and credit card issuers,
which are beginning to take on riskier clients as they look to expand revenue.
The Aspen Institute, a research group in Washington, estimates that 10 million
microbusinesses have trouble getting bank financing. But only an estimated
150,000-170,000 people currently are working with lenders and programs designed
for microbusinesses. In 2002, there was about $93.6 million in microloans
outstanding, with the average business borrowing about $7,000.
Microlending gained popularity in poor countries such as Brazil and Bangladesh,
where successes prompted its supporters to try it in the United States so the
poor wouldn't have to use high-interest credit cards to finance their small
businesses.
U.S. microlenders say their interest rates average anywhere from 9 percent to 12
percent. Credit card rates averaged 12.1 percent in the first quarter, but can
be closer to 20 percent for those with poor credit histories.
The practice has grown quickly over the past decade as major companies have
downsized, more low-skilled immigrants have come to the country and factory jobs
have been cut in rural areas, the institute found. There were 108 microlenders
in 1992 and more than 550 now.
But that growth has also hurt because most new microlenders are too small to
become efficient enough and reach enough people to pay all their expenses,
Servon said.
The biggest microlender in the United States is the Accion network, which has
about $25 million in loans outstanding to around 2,800 clients, including Rice
and Albelo.
Accion may be a nonprofit, but it operates like any other lender, said Bill
Burrus, president and chief executive of Accion USA. It tries to collect on the
10 percent of loans that are delinquent, sometimes sending people to collection
agencies.
About 35 percent of a typical microlender's funding comes from the federal
government, with about 22 percent from state and local governments, 27 percent
from private sources and the rest from income from fees and interest, according
to the Aspen Institute. Microlenders say they are worried that they might lose
funding as the federal government tries to plug the growing U.S. deficit.
The Small Business Administration has proposed eliminating funding for its
microloan program, which had $15 million in loans last year, said Tee Rowe, the
agency's acting associate administrator for congressional affairs. Congress
could reject the proposal, but the SBA is proposing to replace it by expanding a
much-larger government-guaranteed loan program that commercial banks run, he
said. Maximum interest rates were about 12.5 percent in early May.
The banking industry wants to work with more microbusinesses and plans to add
targeted advertising for its services, although banks typically have stricter
standards for collateral than microlenders, said James Ballentine, director of
community and economic development of the American Bankers Association.
The SBA program guarantees up to 85 percent of loans under $150,000, which
should help banks work with more microbusinesses, Rowe said.
Microlenders also try to help clients long enough to establish their credit and
then send them to banks. But the prospect of going back to a bank isn't what
Rice and Albelo want to hear.
"I'm happy where I am," said Albelo, 46, a Cuban exile who escaped the
island nation in 1990.
He started his print shop with $1,200 in savings, but that wasn't enough to buy
modern equipment.
Then Accion lent him $15,000 at about 12 percent interest. He now has about
$150,000 in annual sales.
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