Mini-Loans in Mini-Towns Produce Mini-Businesses

EIGHTEEN posts sunk in a rectangular pattern in the soil behind Cathy Goslin Smith's house are the "roots" of a greenhouse and landscaping business she is starting in the little community of Rosalie, Neb.

Her business has been supported by a $650 loan from the Rural Enterprise Assistance Program (REAP) of Walthill.

"I wouldn't have been able to think of starting a business without REAP," Ms. Goslin Smith says.

REAP is one of about 100 nonprofit organizations in the United States that are redefining the "small" in small business. These groups provide modest loans to storefront and home-based businesses typical of those run by self-employed people.

A 1989-90 study by the Center for Rural Affairs in Walthill found that 51 percent of all income in the farm-based counties of Iowa, the Dakotas, Minnesota, Kansas, and Nebraska comes from self-employment.

"There has been no rural development strategy that attempted to build on this fact," says Gene Severens, REAP project leader.

So the Center for Rural Affairs developed REAP, which made its first micro-loan to a small business in 1990.

Until recently, REAP loaned money from grants given by the Ford and Charles Stewart Mott Foundations. In summer 1992, the US Small Business Administration (SBA) approved REAP's request for an $80,000 loan. Thirty-four other nonprofit micro-enterprise groups in the United States also received SBA loans ranging from $80,000 to $750,000. REAP will use the SBA money as loan capital for seven associations of small businesses in northeast Nebraska.

"What's intriguing about REAP is that it's ... in such a small town, and yet it's so incredibly sophisticated as to be competitive" for the SBA loans, says Dwight Johnson, SBA public information officer in Omaha.

Walthill, population 747, is in Thurston County, one of the poorest counties in Nebraska. But business is growing.

Goslin Smith is chairwoman of Double W Enterprises, a REAP association of eight self-employed people in Walthill and Winnebago. From this "borrowing group," six members have taken out micro-loans ranging from $250 to $2,000 - peanuts to the SBA. By SBA standards, micro-loans are $10,000 to $25,000, Mr. Johnson says; the average size of an SBA loan in Nebraska is $180,000.

Rose Jaspersen, REAP's assistant project leader, cites three gaps people face "between the wish to start a business and actually starting one: financial, training, and networking." REAP tries to bridge all three gaps.

When entrepreneurs want to form a borrowing group associated with REAP, they must raise a community contribution of at least $1,000. Of that amount, a one-time fee of $500 goes to REAP to cover start-up costs and business training. The balance is put into a loss-reserve fund and leverages a 10-to-1 contribution from REAP, at most $25,000. The REAP contribution is used for loans to association members.

If a group member defaults on a loan, the loss is covered by the group's loss-reserve fund. Members pay $2 a month into the fund. The Small Business Administration requires REAP to keep its own backup loss reserve.

Group members must attend REAP's training sessions on topics like marketing, finance, and customer relations. Training is open to the community at no charge - another way of engaging the community in the process.

"The best benefit is instruction on how to keep records and on customer relationships," says Double W member Jim Davis. A pest exterminator, he borrowed $500 from REAP to buy a used pickup truck for his business.

To receive a loan, an association member must do a presentation to the group, identifying how the money will be spent and how it will be paid back. All members are trained to prepare and evaluate loan presentations.

Andrea Collins borrowed $325 to buy software for Impact Computing, her computer-consulting business. She remembers getting valuable advice during her presentation. "The main thing we talked about was pricing," she says. "It's hard to know how to price a service, and I was afraid of overpricing myself."

"They learn more from each other than they do from us," says project leader Severens. "We call it `just-in-time' learning. People learn better when they learn something they really need."

The 75 members of REAP's associations run a variety of businesses including auto mechanics, organic oat-milling, soil- and water-testing, oil and lube businesses, woodcrafters, bookkeepers, and a weaver who recycles rags into rugs.

By paying off small loans, these self-employed people develop good credit records and can move on to larger REAP loans or loans from conventional lending institutions.

Of the 37 loans REAP has given to associations since 1990, no borrowers have defaulted. Some loan payments are late, however, and REAP is helping the associations work out procedures to deal with past-due payments. Interest on loans is the prime rate plus 1 percent on a person's first loan. Borrowers pay an installment at a monthly group meeting.