In cities like Miami, New York, Houston and Los Angeles, a small but growing group of mostly immigrant and minority entrepreneurs are turning to microfinancing. These loans, generally provided by nonprofit groups, can serve as stepping stones to more traditional sources of credit and are often the difference between success and failure for small business owners who may have nowhere else to turn for the money they need to build a business.
“You know this ‘Buy Local’ movement? There’s starting to be this ‘Lend Local’ movement,” says Premal Shaw, president of the nonprofit Kiva, which allows individual donors to select a micro entrepreneur online, a process he likens to Match.com meets microfinance.
For smaller start-ups, especially those owned by minorities, it can be tough to get the financing needed to expand and grow a business. Just under a quarter of non-minority firms whose total revenue was less than $500,000 received loans, compared to 17 percent of minority firms, according to government figures. Making things worse, banks have become pickier about who they lend to since the financial crisis began in 2008.
Activity among micro-lenders, however, has been gaining steam. The number of microloans disbursed increased 25 percent between 2008 and 2010, according to a study by Washington, D.C.-based think tank The Aspen Institute’s FIELD program. Women entrepreneurs are the most likely to turn to microloans.
Lynette Tyner was a struggling African American fashion designer from New York. She used $10,000 in loans from nonprofit microlender Accion to buy machinery and open a studio and retail store to sell her denim outfits and bags. She now sells her designs online and through New York wholesalers.
For some microlenders, the relationship with the entrepreneurs goes beyond the loan. Financial literacy classes, mentoring and other training is often part of the program.
“I was able to meet some great people and get priceless advice for my business like the editor-in-chief of Glamour Magazine and the CFO of Ralph Lauren,” says Tyner of the additional support Accion provided. She even got to attend a workshop with fashion designer Tory Burch.
Microloans tend to range from $500 to $10,000, but can be as much as $50,000, with interest rates varying from 3 percent to 18 percent. Loans usually are repaid within six months to several years, and often they go to businesses that employ just one or two people. Requirements differ, but credit standards tend to be lower than those of banks and other financial institutions, and the loans are processed quickly. Individual donors who lend to entrepreneurs on Kiva don’t earn interest, or profit, from the loans.