Microlending programs serve as greenhouses for Main Street businesses
By Audrey Wright-Cipriano
Microlending has existed for decades in impoverished third-world countries, but in the last few years, the concept has been gaining momentum in the United States. Symptoms of the recession—such as tightened commercial credit, diminished credit scores and the disillusioned unemployed who have decided to “go it on their own” after fruitless job searches—have created pent-up demand for alternative small-business financing options.
According to the Association for Enterprise Opportunity, the trade association for microlenders, in 2011 more Americans became entrepreneurs than anytime in the last 15 years. The association reports that while the median net worth of business owners is on average 2.5 times higher than non-business owners, not all business owners are wealthy. Some groups such as women- and minority-owned businesses are still often underserved by financial lending institutions.
In these instances microfinance can play the role of small-business incubator by compensating for the difficulties often faced by very small businesses and startups trying to obtain credit. Would-be borrowers may have little or damaged credit or be considered risky due to employment status or lack of collateral. These individuals also cost more per dollar to evaluate and monitor as many lack detailed balance sheets or other financial information about their businesses that lenders need when making credit decisions.
While community banks may not be able to provide financing to these individuals in the here and now, many are creating innovative ways for these nascent entrepreneurs to find the capital they need to start or expand their businesses, while simultaneously nurturing what will hopefully become traditional commercial lending relationships down the road.
One such example comes from Rick Parks, senior lender and senior vice president of commercial lending for TheBank of Edwardsville in Edwardsville, Ill. Parks says that in 2010 the Madison County Treasurer’s Office reached out to local financial institutions in the county in a bid to secure financial sponsors for an economic development initiative that would help satisfy the need for capitalization for new and existing small businesses.
The proposal called for establishing a microloan program that would create a place for borrowers who may otherwise be unable to secure financing from traditional lenders and need assistance in accessing safe and affordable capital to expand or create small businesses in Madison County.
Parks says that fostering economic development on Edwardsville’s Main Street is already part of the 145-year-old community bank’s DNA, but when its senior staff learned that the Madison County Treasurer’s Office had designated national microlender organization Justine Petersen as the administrator of the program, the decision to participate was easy.
A nonprofit organization founded in 1997 and headquartered in nearby St. Louis, Justine Petersen offers microloan programs to help individuals and small businesses by focusing on increasing borrowers’ assets through education and training.
The right fit
“We were delighted to partner with Justine Petersen,” says Parks, who references the nonprofit’s comprehensive menu of small-business startup services, including training, technical help, and tools borrowers can use to establish or reestablish credit. “They have the platform and the experience to do a great job and TheBank of Edwardsville can become an axel in the wheel rather than taking on the task of reinventing the wheel.”
So it was agreed that TheBank of Edwardsville would serve as the program’s sole financial sponsor as part of its commitment to the small-business community in Madison County (for which the bank receives Community Reinvestment Act credit), and that donations from the bank would be used to establish a 10-year revolving loan fund. Loans can be used for equipment, working capital and investory, and the program’s loan rates are fixed (at press time, ranging from 8.6 to 9.5 percent).
Parks says that in the past 18 months, TheBank of Edwardsville has referred a number of individuals to the microloan program, which so far has generated 28 loans totaling more than $325,000 in credit.
“The average loan amount that people borrow is $11,700, and borrowers own businesses as varied as restaurants, plumbing and heating, hair care, daycares and more,” Parks says.
And because no lender enjoys turning down a small-business owner with potential, as far as Parks is concerned, the Madison County mircoloan program is a win-win: “We can refer the applicant to the program, and the individual can find the funding that he or she needs. Plus, the bank is able to offer other banking services such as its ‘Fresh Start’ checking account that helps establish the applicant as a customer of the bank while also helping the customer improve his or her credit and graduate into a traditional checking account.”
And, with a third-party handling all the administrative aspects of the program, TheBank of Edwardsville can demonstrate its commitment to the small-business community without needing to worry about the extra staffing or costs it would take to create a similar program on its own.
Audrey Wright-Cipriano is ICBA’s director of marketing and brand strategy.