Little loans, big benefits: hundreds of community-based agencies loan small amounts to start-ups and existing home businesses - includes related articles on two case studies of individuals who received loans and includes a directory of microloan institutions

Home Office Computing, July, 1993 by Paul Edwards, Sarah Edwards

Until recently, there were very few options for borrowing small amounts of money (under $10,000) to start or expand a home business. Banks usually don't make loans to home businesses. And venture capitalists won't even talk about such small amounts. The best hope has been to take out a home-equity loan, run credit-card balances to the max, or borrow from a friend. But there is good news. More and more private, nonprofit, community-based institutions are being formed, and they are giving more and more microloans--from $250 to $25,000. Over 200 microloan organizations use private or public sources from a revolving loan fund to make short-term loans to low-and moderate-income individuals who want to start or expand a business. A high percentage of the loans are made to people who run home-based businesses. The purpose of the loans is clear: to promote self-employment and business development for people and areas that were hard hit by the recent recession.

THE ORIGINS OF MICROLOANS

Interestingly, for some time the U.S. government has been giving $75 million a year to fund such microloan programs in other parts of the world through its AID program. Over the past five years, however, microloan programs have popped up in the United States and many more are on the drawing board. A 1991 study by the Association of Enterprise Opportunity (AEO), an organization of microenterprise agencies, found 22 microloan programs in California alone, with another 17 in the process of starting up. According to Robert Friedman, one of the founders of AEO, microloan programs in the United States have at least three different origins. Some, like the 10-year-old Women Venture program in St.

Paul, are indigenous home-grown programs. Others have been inspired by programs in Great Britain and France, where more than a million unemployed and welfare recipients were bootstrapped into self-employment during the 1980s. The Third World, specifically Asia and Latin America, where such programs are widespread and commonplace, served as an additional model for some of the early programs, such as Working Capital/ICCD (see listing) in New England and MICRO in Arizona.

CHARACTER-BASED LENDING

While conventional loans are awarded primarily on collateral, credit history, equity, or previous business success, microloans are based primarily on a belief in the borrowers' integrity and the soundness of theft business ideas. Each lending program has a different focus within its given region. Some provide loans only to existing businesses. Others serve only one population-- such as women, low-income groups, or welfare recipients.

Some programs give loans directly to individuals while others make peer-group loans. In peer-group lending, several people band together to obtain financing. Some programs grant a loan to all of its members simultaneously. Others require that groups decide who among them will get the first loan, then after a certain number of payments are made on that transaction, the next person can obtain a loan, and so on down the line.

Working Capital, for example, which serves rural areas in New England and is considered by many to be the "mother" of U.S. microenterprise, lends only to existing businesses. Its philosophy is to make the program open to anyone who can talk her way into a borrowing group. Many of their borrowers operate part-time businesses.

The North Carolina Rural Economic Development Center is another model program. It sets no income restrictions on its borrowers, and while most borrowers want to start businesses, some have been in business three or four years and need money to grow.

The Rural Enterprise Assistance Project (REAP) makes loans to stimulate economic development in tiny Nebraska towns that have been written off as too small to matter. A given town forms a small-business association that raises from $1,500 to $2,500 in local funds. These local funds are matched three-to-one by REAP. The association then loans the funds to local citizens to start businesses.

For MICRO of Tucson, Arizona, the largest of all microloan programs with 900 to date (averaging $1,700), job creation is paramount. This program recently topped the $1 million mark. States are also getting involved in developing microloan programs. Montana, along with other predominantly rural states, has launched the statewide Microbusiness Finance Program, allocating $3.25 million for microloans, training, and technical assistance to new and existing businesses.

THE SBA MICROLOAN PROGRAM

In June 1992 the Small Business Administration (SBA) launched a five-year demonstration project providing $75 mil- lion in funds to 47 existing nonprofit microloan programs that have been in business for at least a year. The goal of the SBA program is to encourage economic self-determination by pro- viding loans to budding entrepreneurs who otherwise would not have access to them.

"Home-based businesses are the most likely to benefit from this type of loan," says Mike Stamler of the SBA public affairs office. These initial demonstration programs may pave the way for a time when virtually any dependable individual with a solid business plan will be able to obtain seed money to launch a home business.