March 12, 2009
When Banks Say No, Microlenders Say Yes
By ELIZABETH OLSON
WHEN banks say no, owners of cash-starved small-businesses aren't giving up on finding loans. Many are turning to microlenders for the money they need to meet the payroll, buy supplies, pay the rent and keep the lights and heat on. These microlenders — community-based nonprofit lenders that draw on a varying mix of financing from the Small Business Administration; other federal, state and local government agencies; and some philanthropies — say small businesses and entrepreneurs are increasingly seeking financing as home equity loans, credit lines and other loans have all but evaporated.
Adding to the pinch, credit card companies are slashing spending limits for many cardholders, including some longtime small-business customers who have relied on their credit lines as a source of ready cash. Even profitable small businesses that once relied on banks for financing are depending more on microlending, a resource that was originally intended to be a lifeline for women, low-income and minority entrepreneurs.
Microlenders around the country say they are encountering a rush of inquiries and an increase in applications for their loans, which usually range from $5,000 to $35,000. "Our office used to get three or four calls a day," said Paige Sato, director of business development at UCEDC, in Union, N.J. "In January, we got eight calls in two hours wanting to know about microloans." In all, she said, she received 72 inquiries for the month, twice as many as in December. Her agency, formerly the Union County Economic Development Corporation, is one of four nonprofit microlenders in the state.
"As credit has tightened, banks are turning down loans, even those they would have approved before," Ms. Sato said. One of the microlender's clients, Jaime Chavez, had no luck with banks. When he and his wife, Ana, opened Xocolatz Gourmet Cafe House, in Westfield, N.J., five years ago, they didn't qualify for a loan from a bank or from the UCEDC, so they borrowed from a friend to open their 24-seat restaurant, whose name is derived from the Mayan word for chocolate.
The business thrived, so the couple decided last year to move to a bigger place three blocks away. But they couldn't get financing from their bank for the move. "My bank just looked at the numbers, even though I had a proven record, including catering for the bank's employees," Mr. Chavez said. He contacted UCEDC — whose average loan in 2008 was nearly $20,000 — to ask if they would provide financing this time. "They came to the restaurant and looked at my operation, and then they went to look at the new location," he said. "I got a loan for $30,000, which wasn't the whole amount I needed, but it was enough to help me renovate the space with a new kitchen and expand to seat 70 people." The loan is for five years.
Federal lawmakers added substantial new financing for microloans to the economic stimulus package approved last month. They allocated $30 million to the Small Business Administration's microloan program, which will be added to the agency's existing $20 million earmarked for microloans.
More people "venture out on their own and become entrepreneurs" during economic downturns, said Representative Nydia M. Velázquez, Democrat of New York, who chairs the House Committee on Small Business. She predicted the new money would help "hundreds of thousands of new small businesses."
In the wake of the 2001 recession, nearly a million jobs were created by micro-enterprises, businesses with five or fewer employees, according to the Association for Enterprise Opportunity, which represents microlenders nationwide. Each microlender has an annual lending limit of $750,000, set by the Small Business Administration, said Eric R. Zarnikow, the associate administrator for capital access at the agency. According to the agency, the average microloan in 2008 was $11,500, usually payable over 10 years at an interest rate of about 11 percent, and is meant for entrepreneurs and small-business owners who would not otherwise have the experience and collateral for a conventional loan.
As demand for microloans rises, the profile of applicants is changing, said Marvin Bryant, chief executive of the Atlanta Micro Fund, a nonprofit lender in the Atlanta area, who is seeing more inquiries from established businesses. Charles E. Berry, president of C..E. Berry Janitorial Service in Atlanta, turned to Atlanta Micro when, in October, his local bank did not renew his financing, including his $50,000 home equity line of credit, even though he had made his payments on time, he said. "That really squeezed me," Mr. Berry said, "because last year, American Express reduced my card limit from $15,000 to $5,000. That was 30 days of free money I could use to pay vendors."
Mr. Berry, who said his commercial office-cleaning business brings in about $1 million in annual revenue, recently was awarded a large contract and needed money to tide him over.. "I will probably have to meet payroll three times — and buy supplies — before the company will pay me somewhere around 45 days to 60 days later," he said. Like others, Mr. Berry was discouraged from searching for another commercial bank because they now require higher credit scores. The Atlanta Micro Fund lent him the $5,000 he was seeking. Without the loan, he said, "I wouldn't have been able to grow my business." Sometimes banks themselves approach microlenders. Ms. Sato, of UCEDC in New Jersey, said that more than half her agency's inquiries now come from banks, sometimes in the form of referrals. Microlenders in North Carolina, Oregon and Texas said they were seeing a similar trend, as small-business owners no longer can rely on home equity lines of credit for cash flow. Greg Walker-Wilson, chief executive of Mountain BizWorks, a nonprofit group in Asheville, N.C., that provides assistance and loans to small businesses, said his office had received five referrals from banks in a recent week — five times as many as in a typical week before the economic crisis.
And many entrepreneurs relatively new to the game are learning the hard way how difficult borrowing can be. Jeff Brown, for example, said that last year, when he bought Ference Cheese, a 40-year-old retail and wholesale company in Asheville, he had no idea how tough it was going to be to obtain a bank loan to expand. After buying the business in July, he talked to a local bank and left "with the impression that opening a line of credit would not be a problem," he said. But in September, the bank started saying, "We'll keep you in mind," Mr. Brown said. By December, he had learned about Mountain BizWorks, and he is awaiting approval for a $50,000 credit line. He plans to develop a Web site to sell the 400 types of domestic and imported cheeses he offers, hire five employees and open four more retail locations in the Asheville area. "You can bail out banks, automakers, insurance companies and everyone else," he said. "But banks won't even give me a penny."