March 12, 2009

When Banks Say No, Microlenders Say Yes

By ELIZABETH OLSON

WHEN banks say no, owners of cash-starved small-businesses
aren't giving up on finding loans. Many are turning to microlenders
for the money they need to meet the payroll, buy supplies,
pay the rent and keep the lights and heat on.

These microlenders — community-based nonprofit lenders that draw on
a varying mix of financing from the Small Business Administration;
other federal, state and local government agencies; and some
philanthropies — say small businesses and entrepreneurs are
increasingly seeking financing as home equity loans, credit lines and
other loans have all but evaporated.

Adding to the pinch, credit card companies are slashing spending
limits for many cardholders, including some longtime small-business
customers who have relied on their credit lines as a source of ready
cash.

Even profitable small businesses that once relied on banks for
financing are depending more on microlending, a resource that was
originally intended to be a lifeline for women, low-income and minority
entrepreneurs.

Microlenders around the country say they are encountering a rush of
inquiries and an increase in applications for their loans, which
usually range from $5,000 to $35,000.

"Our office used to get three or four calls a day," said Paige Sato,
director of business development at UCEDC, in Union, N.J. "In January,
we got eight calls in two hours wanting to know about microloans." In
all, she said, she received 72 inquiries for the month, twice as many
as in December. Her agency, formerly the Union County Economic
Development Corporation, is one of four nonprofit microlenders in the
state.

"As credit has tightened, banks are turning down loans, even those
they would have approved before," Ms. Sato said.

One of the microlender's clients, Jaime Chavez, had no luck with
banks. When he and his wife, Ana, opened Xocolatz Gourmet Cafe House,
in Westfield, N.J., five years ago, they didn't qualify for a loan from
a bank or from the UCEDC, so they borrowed from a friend to open their
24-seat restaurant, whose name is derived from the Mayan word for
chocolate.

The business thrived, so the couple decided last year to move to a
bigger place three blocks away. But they couldn't get financing from
their bank for the move.

"My bank just looked at the numbers, even though I had a proven
record, including catering for the bank's employees," Mr. Chavez said.
He contacted UCEDC — whose average loan in 2008 was nearly $20,000
 — to ask if they would provide financing this time.

"They came to the restaurant and looked at my operation, and then
they went to look at the new location," he said. "I got a loan for
$30,000, which wasn't the whole amount I needed, but it was enough to
help me renovate the space with a new kitchen and expand to seat 70
people." The loan is for five years.

Federal lawmakers added substantial new financing for microloans to
the economic stimulus package approved last month. They allocated $30
million to the Small Business Administration's microloan program, which
will be added to the agency's existing $20 million earmarked for
microloans.

More people "venture out on their own and become entrepreneurs"
during economic downturns, said Representative Nydia M. Velázquez,
Democrat of New York, who chairs the House Committee on Small Business.
She predicted the new money would help "hundreds of thousands of new
small businesses."

In the wake of the 2001 recession, nearly a million jobs were
created by micro-enterprises, businesses with five or fewer employees,
according to the Association for Enterprise Opportunity, which
represents microlenders nationwide.

Each microlender has an annual lending limit of $750,000, set by the
Small Business Administration, said Eric R. Zarnikow, the associate
administrator for capital access at the agency. According to the
agency, the average microloan in 2008 was $11,500, usually payable over
10 years at an interest rate of about 11 percent, and is meant for
entrepreneurs and small-business owners who would not otherwise have
the experience and collateral for a conventional loan.

As demand for microloans rises, the profile of applicants is
changing, said Marvin Bryant, chief executive of the Atlanta Micro
Fund, a nonprofit lender in the Atlanta area, who is seeing more
inquiries from established businesses.

Charles E. Berry, president of C..E. Berry Janitorial Service in
Atlanta, turned to Atlanta Micro when, in October, his local bank did
not renew his financing, including his $50,000 home equity line of
credit, even though he had made his payments on time, he said.

"That really squeezed me," Mr. Berry said, "because last year,
American Express reduced my card limit from $15,000 to $5,000. That was
30 days of free money I could use to pay vendors."

Mr. Berry, who said his commercial office-cleaning business brings
in about $1 million in annual revenue, recently was awarded a large
contract and needed money to tide him over..

"I will probably have to meet payroll three times — and buy supplies
— before the company will pay me somewhere around 45 days to 60 days
later," he said. Like others, Mr. Berry was discouraged from
searching for another commercial bank because they now require
higher credit scores.

The Atlanta Micro Fund lent him the $5,000 he was seeking. Without the
loan, he said, "I wouldn't have been able to grow my business."
Sometimes banks themselves approach microlenders.

Ms. Sato, of UCEDC in New Jersey, said that more than half her
agency's inquiries now come from banks, sometimes in the form of
referrals. Microlenders in North Carolina, Oregon and Texas said they
were seeing a similar trend, as small-business owners no longer can
rely on home equity lines of credit for cash flow.

Greg Walker-Wilson, chief executive of Mountain BizWorks, a
nonprofit group in Asheville, N.C., that provides assistance and loans
to small businesses, said his office had received five referrals from
banks in a recent week — five times as many as in a typical week before
the economic crisis.

And many entrepreneurs relatively new to the game are
learning the hard way how difficult borrowing can be.

Jeff Brown, for example, said that last year, when he bought Ference
Cheese, a 40-year-old retail and wholesale company in Asheville, he had
no idea how tough it was going to be to obtain a bank loan to expand.

After buying the business in July, he talked to a local bank and
left "with the impression that opening a line of credit would not be a
problem," he said. But in September, the bank started saying, "We'll
keep you in mind," Mr. Brown said.

By December, he had learned about Mountain BizWorks, and he is
awaiting approval for a $50,000 credit line. He plans to develop a Web
site to sell the 400 types of domestic and imported cheeses he offers,
hire five employees and open four more retail locations in the
Asheville area.

"You can bail out banks, automakers, insurance companies
and everyone else," he said. "But banks won't even give me a penny."