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A Helping Hand Withheld?

The Bush Administration is eliminating funding for the SBA's MicroLoan Program -- a move critics say will hurt urban entrepreneurs

Esperanza Mora-Garcia lives in North Philadelphia, only blocks away -- but worlds apart -- from the wealthy bustle of shops and restaurants in nearby Old City. An elevated train line covers one of her neighborhood's main arteries, Front Street, populated by many dilapidated or abandoned row houses. There are few businesses and few people on the streets -- indeed, the neighborhood is an example of Philadelphia's pockets of economic stagnation and poverty outside the city center.

But Mora-Garcia, a former welfare recipient and mother of six whose first name means "hope," also represents the neighborhood's hope -- and an emerging entrepreneurial trend in depressed communities. With the help of a local nonprofit group, she recently started her own cleaning service catering to Philadelphia's wealthier neighborhoods, which in just a few months has grown from a handful of clients to nearly 60. She now sets her sights on being one of the city's largest services. What does the future hold? "If I can keep going? I want to be on top," she says.

Increasingly, in the U.S. and abroad, governments and nonprofits are finding success by using small-business growth as a tool for community revitalization. Rather than throw money at economic and social problems, budding entrepreneurs are being taught business skills, ownership principles, and how to make a profit.


The theory is that as these small businesses grow, so does the micro-economy, creating jobs and reducing poverty and related social problems. (Small businesses traditionally generate between 60% and 80% of net new jobs, and in 2000-01, the most recent data available, small businesses were responsible for all net new jobs in the U.S., according to the Small Business Administration.)

Supporters say such programs work because, while unemployment can be higher and per capita income lower in poorer neighborhoods, the market still demands childcare, cleaning and grocery services, and other commerce -- representing opportunity for homegrown entrepreneurs such as Mora-Garcia.

"Large retailers weren't willing to go into these areas," says John Schall, president and CEO of the Washington (D.C.)-based National Congress for Community & Economic Development, a trade organization of Community Development Corporations.


Mora-Garcia is working with the Empowerment Group, a North Philadelphia nonprofit that teaches business skills and prepares budding entrepreneurs to approach creditors and investors. "The clients we work with don't always have a high level of education; have little or no savings, if not some debt; and they don't always have the types of resumes that allow them to get high- or fair-paying jobs," says Sylvie Gallier, EG's executive director. "For them, entrepreneurship isn't just an opportunity. Sometimes it's the most attractive choice."

Mora-Garcia is part of an advanced class of five students with some business or work experience. Since enrolling, she has gone from working solo to managing seven employees who clean dozens of houses, and has also started offering personal-assistant services to her clients. EG is now teaching her how to handle human-resources, finance, and accounting challenges, as her business expands more quickly than she expected.

Among Mora-Garcia's classmates is Yoselin Ocasio, who owns and rents out several residential properties and recently purchased a restaurant. At first convinced she could simply reopen the eatery after purchasing it, Ocasio quickly learned about the need for permits, health checks, and a solid business plan at EG. What would have happened without the classes? "I'm 100% sure -- bankruptcy," she says.


But while the approach has gained favor in community-development circles, those same supporters are now worried such fledgling entrepreneurs are losing an important source of funding to help raise their companies. Despite meeting most of its performance goals in a recent review, the Bush Administration's 2006 budget eliminated funding for the SBA's MicroLoan Program, in favor of the larger 7(a) program, which serves somewhat more-established businesses.

The MicroLoan Program offers loans -- made through nonprofit intermediaries, instead of commercial banks -- as small as a few thousand dollars to businesses and individuals with no other access to capital because of bad credit history or the small size of the loan.

Without the MicroLoan Program, low-income entrepreneurs will increasingly turn toward independent microlenders. Of the some 600 microlenders in the nation, 170 received support under the SBA's MicroLoan Program. The others work from endowments, charitable foundations, and donors. As SBA funding disappears with the 2006 budget, those microlenders involved with the SBA will have to cut back their programs or search for new sources of funding that many in the industry say are increasingly scarce.

The Philadelphia Commercial Development Corporation was one such SBA lender that will discontinue its MicroLoan Program due to the cuts. The PCDC offers training and guidance to develop business plans, and then uses the MicroLoan Program to provide capital to startups. "I believe we will be dramatically impacted," says Curtis Jones, Jr., the PCDC's executive director. "It's a small percentage of our total budget, but it's an important percentage. That small, $35,000 loan allows us to fill a market niche, but [without] that kind of SBA assistance, we wouldn't be able to help those people."


The elimination comes as part of an overall SBA budget tightening. "The MicroLoan Program was not cost-effective," says Raul Cisneros, the SBA's director of communication. According to Cisneros, the MicroLoan Program incurred a dollar in costs for each dollar loaned out. He says that the SBA's 7(a) loan program, which uses commercial banks as loan intermediaries, is more cost-efficient. The program is self-sustaining and serves a greater number of businesses -- 10 times as many loans as the MicroLoan Program did in 2004. "We're just trying to be very judicious with taxpayer money," he says.

But while both programs use intermediaries to make loans, they target different socio-economic groups. "It's comparing apples to oranges," Schall says. The 7(a) program, "doesn't serve primarily those at the lowest income levels, nor is it targeted to organizations expert at serving low-income people in disadvantaged communities." The 7(a) program works through commercial banks, with the government acting as a partial guarantor of the loan, giving banks an added assurance that they'll make their money back.

According to data from the Association for Enterprise Opportunity, a national association of microenterprise developers, participants in the MicroLoan Program have credit scores an average of 150 points lower than those in the 7(a) program, making them much less attractive clients for commercial banks offering 7(a) loans.


And with the Bush Administration tightening the program's belt, many microlenders may have to do so as well. "A lot of [microlenders] will be really struggling, and ultimately I would predict that a number of them will have to close their doors or shrink their efforts," says Bill Burrus, president and CEO of Accion U.S.A., one of the nation's largest private microlenders.

Since the PCDC's MicroLoan Program will be one of those casualties, EG's entrepreneurs may soon find their options for loans limited. "We help businesses to get started the right way, but if they're unable to get capital, they might never reach their potential and become successful," Gallier says. These agencies have given hope to clients such as Mora-Garcia, but right now they could use a little hope of their own.

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