A Lending Hand

For more than a decade, microloan schemes have tried to turn poor people into entrepreneurs. Sometimes they succeed

The scene was pure south of the border. Mariachis wearing sombreros played rancheras, while the seductive aroma of hand-rolled enchiladas de mole wafted among the hungry patrons who crowded into Antojitos Mexicanos ("Mexican Cravings") in Brooklyn, N.Y. Ulvada Alvarado--entrepreneur, immigrant, American success story--was throwing a big, noisy party. The occasion? The January debut of the fourth restaurant she has opened since arriving penniless from Mexico in 1979. The party, though, could just as easily have marked the coming-of-age of the decade-old microenterprise development movement that made Alvarado's achievement possible.

Bootstraps. Microenterprise programs, run by community-development corporations, nonprofits, and government agencies, follow a philosophy pioneered in developing nations: bootstrap people out of poverty through entrepreneurship. In the U.S., that means making market-rate loans of $500 to $30,000 to people who can't qualify through the usual channels, while relaxing the normal credit standards. There's no need to provide the customary three years of tax returns, and lenders accept personal property such as cars for collateral. The critical factors to qualify? Character--and cash flow. "We evaluate their initiative, their knowledge of their business, the desire and capacity to repay," says Terri Ludwig, president and CEO of Accion New York, a part of the nation's largest microlender, Accion International in Boston.

Alvarado, for instance, first sold her tacos in the streets of Brooklyn's poor Williamsburg neighborhood and later out of a truck trailer in a car lot; her first real restaurant was in a garage. Then, in 1991, Accion New York, which draws on lines of credit from several major banks, began lending money to the 40-year-old single mother of four. To date, she has received six loans totaling $23,000, all of them at 16%. Last year, she had sales of $255,000; next year, she projects $450,000.

Loans are just one aspect of these groups' work. New York's Trickle Up provides actual seed grants of up to $700--no repayment expected--to people who can't even meet microlending criteria. But startup training and technical support is the biggest activity. That's what most of the 57,000 entrepreneurs aided by microlenders got in 1997, the latest year for which data are available from The Aspen Institute in Washington. On the lending side, the programs provided $33.3 million to 6,153 borrowers, some of whom received very modest sums. Some 589 small loans went to little groups of entrepreneurs who share the risk for default by any of the members. Microlenders typically require a co-signer in the absence of collateral, and will turn bad debts over to a law firm for collection.

The big question for the microenterprise movement is whether it can--or should--continue to grow. "Nobody has come on board in a big way--neither the private-foundation money sources nor the government--to say `O.K., we're going to fund this for the long haul,"' notes Lisa J. Servon, a Rutgers University professor and author of Bootstrap Capital: Microenterprises and the American Poor. Anecdotal evidence does suggest that microlenders can jump-start a struggling small business and change lives, but the record on job creation and defaults is less encouraging. A 1999 Accion International study of 537 clients with two loans apiece found they had created only 193 jobs. And a 1994 Charles Stewart Mott Foundation survey pegged microloan defaults nationwide at a steep 9.5%, compared with that year's 2.22% for standard business loans.

Still, microenterprise development efforts are clearly growing (chart, page F.41), encouraged by a boom economy and a culture that exalts entrepreneurs. "That helps our program and makes more resources available," says Ludwig of Accion New York. Resources include both money and volunteer mentors from established small-businesses. For example, in Brooklyn, Valentin Feliciano, president of Citywide Security Services, has helped Accion get the city's Latino-owned banks to refer rejected loan applicants.

Partners. Banks are on the case, too. Considering microloans' hefty costs--an Aspen study pegged the average at $1.47 per dollar lent--banks rarely pursue these borrowers. But, motivated by good citizenship or by federal requirements for community reinvestment, commercial lenders are partnering with micro agencies. "At the end of the day, many of these groups provide us with access to customers, future or potential," says Martin J. Geitz, president of the Fleet Community Development Corp. Fleet Boston Financial Corp. has committed $17 million over five years for technical assistance, and it recently joined with an agency in Hartford to provide $2.5 million for microloans. A few states are getting in on the act, too. Iowa's Institute for Social and Economic Development offers state-backed loan capital to low-income entrepreneurs. Pennsylvania has injected $17.8 million in loan capital and grants for technical assistance into microenterprise agencies.

Even though these programs are seeking funds to expand, it's not always easy to attract would-be entrepreneurs. Some shun training and advice programs that aren't sensitive to their cultures and backgrounds, says Rutgers' Servon. So, Accion's Ludwig has hired an ad agency to attract borrowers. On the finance side, Ludwig, an ex-Wall Streeter, is moving in several directions. To drive down defaults, she's increasing scrutiny of collateral on one hand, and expanding technical assistance on the other, noting research that ties training to the survival of a business. She has introduced financial innovations, such as bringing in a bank on a larger-than-usual micro loan. She's even found a buyer for a portfolio of Accion loans--the Community Reinvestment Fund of Minneapolis, a fund for "socially responsible" investments. The lending may even become a bit less micro, raising limits to $50,000. Entrepreneurs want it, and so do the banks, as a way to shore up the agencies' operating budgets.

But the organizations don't want to lose sight of their founding mission. They're not here to launch the next Amazon.com. Success for microlenders is lifting someone out of poverty. Says Jason J. Friedman, vice-president of Iowa's Institute for Social and Economic Development: "Economic development is not just about high tech and large projects. It's also about beauty salons, alteration shops, and auto repair." That, and a little restaurant in Brooklyn, where you can get a terrific taco.

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