Loans for the little guys
'Microlending' evokes programs to aid high-risk entrepreneurs abroad. Why it may show up on your street.
Starting a business was the last thing on Jason Salfi's mind in 1996, when he sat on a dock in Sausalito, Calif., and started making "long board" skateboards.Skip to next paragraph
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All Mr. Salfi wanted was a board to replace the outdated 1970s model he'd been using, which, he recalls, "was just a big oak plank."
Little did he know that he was on the way to becoming a "micro- entrepreneur" success story - joining the ranks of a growing number of Americans who have become part of a "microenterprise" movement
The movement is based on grass-roots financial principles developed in the 1960s to help the poorest of the poor start their own businesses in third-world countries. America's microenterprise sector boasts an array of entrepreneurs, including immigrants, women, senior citizens, and small inventors.
"It's amazing who's involved," says Mark Cousineau, executive director of the Connecticut Community Investment Corp., a nonprofit microloan lender. "It could be your neighbor. It could be you."
Small microlending programs, run by churches and other socially active organizations, have been around in the US for at least the past 20 to 30 years.
But the movement didn't begin to formalize until the early 1990s, when several programs took shape. For example, the Small Business Administration's microloan program, which has loaned some $200 million since it began in 1992.
According to a 2000 study commissioned by Accion USA, a nonprofit organization and the largest microlending network in the US, there are some 13.1 million microentrepreneurs across the country.
By definition, a microentrepreneur runs a business with fewer than five employees, has a strong personal involvement in the business, and likely has no credit record or assets.
Microenterprises generally require less than $35,000 to launch, and microloans usually run from $500 to $50,000.
Banks routinely reject loan requests from such businesses because the costs involved are too high and the returns too low, leaving many would-be entrepreneurs locked out of the traditional financial system.
Microenterprise lenders are filling this gap. These nonprofit institutions use private or government funds, or a mix of both, to help the smallest of small entrepreneurs who would otherwise have no access to capital.
Microlenders charge interest rates higher than those charged by banks - around 12 percent to 16 percent - but they also provide technical assistance in how to plan, market, and manage a business.
"We're really providing a hand up to people who are on the bottom of the economic ladder," says Christianna Beebe, director of communications for Accion USA. "The building blocks that so many of us consider fundamentals, such as savings, insurance, and assets, are out of reach for many of these people."
In Salfi's case, his business grew gradually out of making skateboards for his friends. He built "long boards," designed to bomb down hills at speeds as high as 65 m.p.h. As word spread about his product, he began selling a few to San Francisco stores, eventually starting Comet Skateboards with his best friend, Jonathan Reese.
"We financed it with money out of our own pockets, we had a couple of thousand dollars," says Salfi of the business's early days. "We'd be excited if we sold 20 boards ... in a month."
With a small loan from a friend and a credit card borrowed from a girlfriend, the two gradually grew the business up to two employees and sales of 50 to 60 custom boards a month, plus another 200 to 300 made for other manufacturers.
But when they were ready to expand again in 2001 and needed money to do so, they ran smack into the problem faced by most microentrepreneurs: They were turned down by a bank for a loan because they didn't have enough of a credit history or enough assets in their business.
Through the grapevine, Salfi heard that the nearby city of Oakland was offering tax incentives to businesses willing to relocate there.
In addition, when he called the Oakland Business Development Corp., a nonprofit group contracted by the city to administer loans and aid to small businesses, he learned that microloans were also available.