How Tiny Firms Finance Small-Business Dreams

Mary Scott’s home-based television-production company, Make*Believe TV, was starting to grow. Her clients included many satisfied small businesses, but the computer system she used for video editing was slowing her down. She couldn’t edit videos that were longer than 15 minutes, and that prevented her seeking bigger, more lucrative assignments filming sales-training and promotional videos. Purchasing a special SCSI computer drive for video editing and a new audio system would solve the problem, but the cost, $4,500, was more than her fledgling business could afford. So she inquired about a loan at three different commercial banks. None of them wanted her business.

By JANET ATTARD Wall St. Journal- StartupJournal

(Many thanks to Mike McCue for passing this along.- Russ)

"I found interest rates were exorbitant, and in three instances the loan officers told me I should just put the equipment on my personal credit card," says Ms. Scott, who lives in Huntington, N.Y.

Ms. Scott’s experience wasn’t unusual. Many banks won’t make commercial loans for less than $50,000. "Small loans take as much or more time and energy to underwrite as much bigger loans," explains Kurt Chilcott, president and chief executive officer of CDC Small Business Finance Corp., a nonprofit lender in San Diego. The traditional lenders also don’t want to take on the higher risk associated with small start-ups and loans that aren’t fully collateralized.

Nevertheless, home businesses and other tiny companies are getting financing, thanks to micro-enterprise-lending programs that have sprung up around the nation. Ms. Scott ultimately purchased the equipment she needed with a micro-loan from the Long Island Small Business Development Corp. (LISBAC). The loan has a five-year term and 7% interest rate. As a result of the loan and the no-cost business training and technical assistance that’s part of the lender’s program, Ms. Scott landed two major clients, one a national furniture chain.

Micro-enterprise-development programs are a concept that came to the U.S. in the early 1960s from Third World countries. The programs provide funding in amounts ranging from $500 to $35,000 to businesses with five or fewer employees. It wasn’t until 1991, however, that the U.S. government created the Small Business Administration (SBA) Micro-loan Demonstration Program, specifically targeting funding to micro-enterprise programs. This program makes funds available to nonprofit community-based lenders (called intermediaries) who in turn make loans to eligible businesses. The program was made permanent in 2001, and the cap for these loans, originally set at $25,000, was raised to $35,000. The average dollar amount is $10,500. In all, the SBA program has provided $80 million in about 7,900 micro-loans since 1992.

The SBA isn’t the only funding source for micro-enterprise-development programs. Other federal, state and local groups provide funding as well. Among them are the U.S. Department of Housing and Urban Development (HUD), the U.S. Treasury Department, the U.S. Department of Agriculture, and many diverse state and local government, nonprofit and private commercial-lending organizations. The Association for Enterprise Opportunity, a trade association for the micro-lending industry, estimates there are now more than 700 micro-enterprise-lending programs in the U.S.

Finding appropriate programs isn’t always easy. Each local program is set up to meet specific community needs, so the sponsoring organization, mission, target groups and loan requirements vary considerably. So, too, do the services offered.

Some, such as the LISBAC program, only serve women-owned businesses. Some lend primarily to businesses that have good credit ratings and can put up 10% of the loan amount from their own funds or other private sources. Others, such as the Greater Cincinnati Microenterprise Initiative (GCMI), make character-based loans to individuals whose credit rating or other financial circumstances make them seem like poor credit risks to most lenders. The micro-loans offered through the GCMI program typically range from $500 to $10,000 and are given to individuals with below-median incomes who are using existing skills and interests to start or expand their business. "We are lenders of last resort," says Alicia B. Townsend, executive director of GCMI. "Many of our clients are women and minorities, and we do all we can to get these businesses up and running and into the mainstream of traditional lending."

A second GCMI loan program has been set up to help more established businesses. This program, aimed at businesses that have been in existence for 24 months or longer, offers loans of $10,000 to $35,000.

No matter the target group, the best of the micro-enterprise-development programs offer extensive training, technical assistance and support. Both LISBAC and GCMI, for instance, provide training and coaching to help businesses develop their plans before they apply for a loan and continuing assistance and support after the loan has been granted. "Money is often the added piece," says Ms. Townsend. "If you don’t have the management skill, don’t have the market and don’t have a plan, you can’t make your business work."

"A business plan is the business’s operating roadmap. If you have a good business plan, the rest follows," says Rosyln Goldmacher, chief executive officer of the Long Island Development Corp., which runs the LISBAC program.

And business owners who benefit from the programs couldn’t agree more. Gail Huff used a $10,000 micro-loan from GCMI to expand her adoption-announcement business, Miracle of Adoption, and its related Web site, Angelbars.com. "I meet with my business coach every month to go over strategic plans and other issues," says Ms. Huff, who’s based in Cincinnati. "That gives me a sounding board, so I know I’m on the right track."

Target or Prey?

Unfortunately, there also are unscrupulous lenders who promote themselves to small business owners who can’t find loans through conventional sources. Rather than helping the micro-sized enterprises, these operations charge steep fees and interest rates. Ms. Goldmacher advises business owners to be suspicious "if a program wants to charge you excessive fees, sends you massive amounts of paperwork without first talking to you or won’t meet you in their office."

Finding Appropriate Programs

Given the wide range of organizations that provide assistance and their varying missions and target clients, how does a micro-enterprise go about locating a program that will meet its needs?

The best way is by reading the business section of local and regional newspapers and by contacting trusted local organizations such as small-business development centers, Service Corps of Retired Executives (SCORE) offices, community-development corporations and chambers of commerce. One can also find lists of intermediaries on the SBA Web site http://www.sba.gov/ and on the Association for Enterprise Opportunity Web site http://microenterpriseworks.org/ .

— Ms. Attard is the author of "The Home Office and Small Business Answer Book" (Owl Books, 2000) and "Business Know-How"(Adams Media, 2000). She is the president of Attard Communications Inc., an editorial content and Web-development firm in Centereach, N.Y. Her Web site is http://www.businessknowhow.com.

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