Entrepreneurs Turn to Microloans

Written by Tom Barry Sunday, November 22 2009

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With the economy in the ditch and credit tight, more and more entrepreneurs are seeking microloans ‒ ranging from the hundreds of dollars into the thousands ‒ to meet their growing needs. Consider Leah Carter, who's expanding her Better for Babies business with the help of a microloan from Appalachian Community Enterprises (ACE). Located in Carrollton, Ga., Carter's small, six-year-old company manufactures and sells cotton diapers and other organic baby products.

Her dilemma? Overseas suppliers were requiring full payment in advance before shipping, and she needed operating capital to cover the lag between outgoing costs and incoming revenue. With a disabled husband and limited collateral, she didn't even try to seek traditional bank financing.

The loan "was quite critical," says Carter, who preferred not to give the amount. "It wasn't that we would have gone out of business, but we wouldn't have been able to continue to grow. Now we hope to fill the orders that have been knocking at our door. And we hope to get lots of new accounts as well." Micro is macro nowadays. Demand for microloans is soaring across the country, and micro-lenders are scrambling to keep up.

Several factors are fueling the surge. Banks have turned their backs on legions of small businesses seeking capital, even ones with good track records, while credit card companies have cut spending limits for many cardholders, among them cash-starved entrepreneurs who once used plastic to obtain stop-gap money.

Plus, with unemployment sky high, many laid-off workers are looking to launch a business rather than pursue that illusive new job ‒ often the modern equivalent of the snark hunt.

"Maybe they had a trade in their previous life that they want to go back to," says Gary Lindner, a board member of the Arlington, Va.-based Association for Enterprise Opportunity (AEO), which promotes microenterprise nationally, to spur economic development, and reduce poverty. "Or maybe they're trying to supplement their income [to recover] lost savings or retirement plans."

Microloans typically go to businesses with five or fewer employees. Such companies total a staggering 25 million nationally, employ 18 percent of all workers and comprise 87 percent of all businesses. Serving these "mom and pop" enterprises are micro-lenders ‒ usually community-based nonprofits that draw on a mix of funding, from private capital to government sources to foundation grants. The average U.S. microloan: nearly $10,000.

"Micro-lenders work the underserved market, which tends to be women and minorities," Lindner says. Cleveland, Ga.-based ACE has been pursuing a much more aggressive course in light of the recession, expanding staff and boosting its microloan portfolio from $700,000 in 2008 to a projected $1.5 million this year. ACE's microloans average $18,000.

"The demand for our loans is really high, and we're getting a different profile of people," says president and CEO Grace Fricks. "In the past, we've mostly loaned to people who couldn't get traditional capital, which meant women, people of color, and low-income people. We still do that, but now we also have a whole cadre of people who have great credit but can't get capital from a bank."

ACE officials made a conscious decision to ramp up operations.

"It may sound crazy, but we just decided we are here to help stimulate the economy, and while we can only make these small loans, we can still do our part," Fricks says. "And, by damn, we're going to do our part."

Woe to today's battered entrepreneur. Since the economy tanked, the number of entrepreneurs having trouble raising capital has increased from 10 million to nearly 20 million nationally, according to the AEO, which estimates that there are 500 micro-lenders across the United States. A recent poll of AEO members showed that the demand for lending had increased 48 percent over 2008, and 58 percent of members reported that securing more capital to make loans was a top need.