'Group Loans' Help New England

BEVERLY FORMHALS admits feeling a little anxious when she opened a new hot dog restaurant with her fiance last spring in this small factory town in central Massachusetts.Not only is this her first business venture, but the area has been hit especially hard by the recession. The unemployment rate hovers around 15 percent while some stores have been forced to close down. But with little help from a new "group loan" program called Working Capital, Ms. Formhals has watched her wiener business, called "Chuck and Bev's Doghouse," become a popular downtown eatery. The idea behind Working Capital is to get business borrowers in groups to take out small loans together. The group provides moral support while peer pressure encourages borrowers to pay back loans. These small-scale entrepreneurs have no collateral. So most were denied bank credit. "It's a great program," Formhals says. "The banks won't touch us. Nobody will give us anything anymore because of the economy and the rate of businesses folding." Working Capital, based at the Institute for Cooperative Community Development (ICCD) of New Hampshire College in Manchester, N.H., coordinates local peer lending programs in Vermont, Massachusetts, and New Hampshire. So far, Working Capital oversees 12 local groups consisting of six to 10 self-employed borrowers. The ICCD, a nonprofit organization, receives commercial loans from banks at 9.5 percent interest and oversees the Working Capital program. ICCD also receives foundation money for operational costs. Working Capital then manages and administers the entire program. But the actual loans are approved by member businesses in various communities; members make loan repayments directly to the banks. The program's 140 entrepreneurs make an unusual group. An animal trainer in Bellows Falls, Vt., for example, borrowed $1,000 for materials to build a dog house. A Burlington, Vt., woman borrowed $500 to develop a logo and buy supplies for her jalapeno pepper business. "We're pretty much small-time for the banks to fool with us," says Charlie Carey, who is paying off a $1,000 loan for his flower shop in nearby Orange, Mass. Group members go through a training period where they learn how to create their own bylaws and elect their own officers. They also learn how to review loan applications and approve each other for loans. A group starts out with each member borrowing $500 with a repayment period of four to six months. No one can borrow more money until every one in the group repays the first loan. Then the group can go ahead and apply for more loans in increments of $500 up until $5,000. Called micro lending, the idea has been widely used in third-world countries like Bangladesh. Jeffrey Ashe, director and founder of Working Capital, says he had a hard time selling the idea when he developed it for New England in 1988. But the regional recession, which began here in 1989, has generated interest in the idea. Group support has been a critical element in the program. In regular meetings, members exchange ideas, provide each other with technical assistance, and encourage each other. "I was scared to death" when the restaurant opened, Formhals says. "But I got a lot of help from my group and they said, 'Just go for it. Jane Rosser, a independent consultant in Vermont, says while the program is still young, it is showing positive results. According to Mr. Ashe, out of 160 loans, only four or five are late or problem loans. The program is also unique among peer lending programs in the US because it delegates responsibility to local levels, keeping costs down, Ms. Rosser says. "To date, it's obvious that there is a lot of potential for the program, especially given the desperate economic situation in rural New Hampshire, Massachusetts, and Vermont," Rosser says. "You go into some of these small towns and you think there's a depression, not a recession. Basically, it's a sign of hope." As for "Chuck and Bev's Doghouse," Formhals dreams of further ventures beyond just franks. "I'm thinking of an ice cream machine. I'd like to get into some frozen yogurt," she says.