Small loan, big solutions: no loan is too small for ACCION New Mexico

New Mexico Business Journal, Dec, 1998 by Charles Poling

For most small business owners, rounding up money is tougher than three-dimensional chess. The trend toward gargantuan banks only makes it worse. Maybe it's hard for a bank with assets exceeding the gross national product of France to understand why someone needs $500 to start a business, but that microloan just might be the difference between economic self-sufficiency and welfare. You might naturally assume that a small bank would be more willing to help out on such a paltry loan.

"A small community bank tends to be more tuned-in to that small customer," says John Phalen, senior vice president of Zia Bank in Tucumcari, "and I try to remember that a $5,000 loan is just as important to that customer as this $5 million loan that I really want to get back to. That's where the megabanks are really missing the customer service part of banking. Even the $50,000-loan customer is getting pushed out at the larger banks because there's less overhead cost to handle a hundred megaloans than a thousand medium-sized loans."

The trouble is, even a small local bank won't touch that $500 business loan, which might be the only obstacle between one burgeoning entrepreneur's good idea and a great business. Loans under $5,000 cost more than they're worth to a bank, Phalen says. "There's just no profit. We won't do them on the commercial side. We might try to steer that customer onto a credit card, instead." Unfortunately, some would-be entrepreneurs don't even have the credit history to get a Visa card.

Not Ready for Prime-time Players

That's where ACCION New Mexico comes in. A privately funded, nonprofit lender in downtown Albuquerque, ACCION specializes in really small loans to small businesses, the ones not ready for prime time, or prime plus one.

"Part of what characterizes ACCION is the accessibility of the financing," says Ann Haines Yatskowitz, the organization's president and ceo. "We try to reach out to people who have limited access to conventional business credit."

That limited access may result from a variety of factors, including the small amount of the loan they need, insufficient collateral, spotty credit history, and a general lack of business experience. ACCION makes the loans easier to get by reducing the requirements. For instance, ACCION accepts non traditional collateral - got a used VCR? - and works with "borrowing circles." The latter are self-selected groups of borrowers who together "cross-guarantee" each other's loans, Yatskowitz says, thereby spreading around the risk.

"Also, some of our borrowers have been turned down by traditional lending sources, so they're discouraged before they even apply," she says. "I think they're intimidated - we hear that word frequently. Our role is to break down some of the barriers to obtaining credit and help entrepreneurs eventually gain access to credit from traditional sources. So we use the loans as a tool for success of the small business owner but also as a training tool on how to manage credit and manage cash flow. This helps them establish business credit, which they can take to the bank."

ACCION provides the tiniest of loans - $200 - but has recently bumped its ceiling up to $50,000. The small loans might provide a salsa maker with money to print labels or enable a seamstress to buy a new sewing machine. Bigger loans could help a dry cleaner renovate a recently purchased property in a high-traffic neighborhood shopping center. Lines of credit, ranging from $5,000 to $15,000, are also available. Although ACCION's clients fit the traditional definitions of "high risk" or "unbankable," Yatskowitz touts their two percent default rate, which she calls a "testament to their character."

ACCION itself borrows from local banks, then relends that money to its customers. Its operations are also funded by contributions from banks and other local business.

"The banks recognize there is a segment of the community that they're not able to serve," Yatskowitz says, "but partnering with ACCION enables them to help small business access capital." Clearly the traditional financial institutions perceive value in this non-profit's work, which is, in essence, grooming future customers by reducing their risk factors - call it a trickle-up theory.

Francisco Simbana, co-owner of Preferred Maintenance with his wife, Nancy, is banking on that theory. With 20 part-time employees, Preferred Maintenance provides janitorial and landscaping services for commercial and government customers around Albuquerque. Simbana says ACCION loans have helped him in several ways, most importantly in "building up the credit file for the company, which is impossible to do in the normal standard financing environment because we couldn't qualify, even right now. Banks don't want to look at me. They don't know anything about my business or what we've done in the last 10 years. The first thing they say is, 'show us your financial statement,' but that doesn't reflect what we've done. So ACCION has helped make us more marketable to lenders."