Even a very small loan, or “microloan,” can make a life-or-death difference to the owner of a small business or a budding entrepreneur. Unfortunately, some are barred from acquiring the funds they need.
“We do have a slice of a small business community that is not able to secure capital funding in the traditional format,” says Virginia Smith, Rochester branch manager for the U.S. Small Business Administration.
Microloans can come to less than $100 or as much as $100,000, depending upon the organization or lending institution involved. Despite the relatively small amounts, these loans can be hard to come by: U.S. commercial lenders are issuing fewer business loans than they did before the 2008 recession.
“The banks have really cut back on business lending overall,” says Hubert Van Tol, president of the nonprofit PathStone Enterprise Center Inc. “In Monroe County, it’s still down 40 percent from what it was pre-crisis, and especially on loans under $100,000, there’s been a big cutback.”
PathStone is a nonprofit community development and human service organization that assists low-income families and economically depressed communities. Its Rochester office provides loans to an area extending from Syracuse, Rochester and Buffalo and everything in between.
Compounding the effects of the banks’ reductions, traditional lenders are often unwilling to offer microloans, especially for very small amounts. A $10,000 loan is much less profitable than one for a much larger sum, though both might carry the same risks and costs.
“Smaller loans are just as much work to underwrite as larger loans,” Smith explains.
Yet another challenge business owners and entrepreneurs encounter is not being able to qualify for loans from traditional lenders due to poor credit histories or other factors. The lack of credit can be particularly felt in Rochester’s poorer neighborhoods.
“There are very few programs that are serving extremely small microbusinesses, which have very low cash flow and potentially have credit issues, that nonetheless are very important neighborhood businesses that serve our high-poverty neighborhoods,” says Henry Fitts, director of innovation for the city of Rochester.
In such cases, Kiva Microfunds might be able to help.
“Kiva is internet-based, crowd-sourced microlending,” says Mike Ing-ham, one of the nonprofit’s two local trustees. “It helps provide loans to people who traditionally cannot get one.”
Operating in 83 countries, Kiva helps people obtain zero-interest, no-fee loans of up to $10,000. Borrowers do not require the credit history or collateral that a traditional lending institution would demand.
“For a bank, the collateral is often stock, or the person’s house, or something else,” says Ingham, who, like all Kiva trustees, is a volunteer. “This is more social collateral—it’s a very trust-based system.”
An applicant begins developing that trust when he or she applies for a loan. The trustee then looks over the applicant’s business plan and the applicant as part of a process that transcends the information on the forms.
“If I like them, I trust them as a person, I say ‘You’re a good candidate,’” Ingham says.
A Kiva loan must also do more than help a new business open its doors or an existing one expand.
“It needs to do some social good,” Ingham says. “A social good could be just creating employment.”
Once a trustee endorses the loan, the application goes to Kiva’s offices to be examined in light of basic criteria; the applicant can’t be in Chapter 11 bankruptcy, for example. If the application passes muster, the applicant must then find 15 to 25 family members or friends who are willing to give loans of $25 each toward the total needed.
“It forces the person to have some vested interest in getting people to say they know and trust the borrower enough to loan the 25 bucks,” Ingham says.
Once the applicant obtains those funds privately, Kiva posts the loan request online. At that point, anyone across the globe can pledge to loan the rest of the funds needed in $25 increments. All of the pledges are paid to PayPal, which offers the service for free to the nonprofit; Kiva takes no cut of any of the monies involved.
Kiva’s two local trustees have endorsed about four loans since they began doing so about a year and a half ago, according to Ingham. In order to boost that figure, the nonprofit is working with local officials to turn Rochester into a “Kiva City.”
“A Kiva City is essentially expanding the reach of the trustees,” Ingham says. “You work with the local government to try to help something that kind of matches the vision of the city, and find the right trustees in the right places to go ahead and find borrowers.”
As part of that effort, the City Council has appropriated $5,500 to help cover the cost of hiring a Kiva adviser to recruit more trustees and run the outreach program.
“We want to make sure that this gets out to the people in the city’s most stressed neighborhoods,” says Amy Ventura, a research analyst with Rochester’s Office of Innovation and Strategic Alternatives. “A lot of our outreach is going to be geared toward making connections with people who are deeply ingrained in the neighborhoods and have established relationships and reputations there.”
The Rochester Economic Development Corp. has supported the venture with a $100,000 50-50 matching loan fund. At the same time, Fitts is bringing together organizations that will help Kiva City’s adviser and trustees accomplish their goals.
“We are planning to build a very intentional network of organizations that are working with small businesses, especially microbusinesses, and partnering with some other organizations who’ve been coming together around this issue,” Fitts says.
That list includes REDCO, the Rochester Downtown Development Corp. and Rochester Institute of Technology’s Center for Urban Entrepreneurship. In addition, Fitts is developing a referral network by which banks and other lenders can encourage those who cannot qualify for traditional business loans to apply to Kiva.
According to Fitts, those networks should be ready to assist Kiva City when it begins signing up borrowers. Ingham says the program should be up and running by late August or early September.
As valuable as the presence of Kiva may prove to local entrepreneurs and small businesses, there have long been other sources of microloans in this area. At PathStone, microloans of up to $50,000 are available for those who have limited credit histories and collateral.
“We give preference to low- and moderate-income borrowers or businesses located in low- and moderate-income census tracts, or ones that will create jobs for low- and moderate-income people,” Van Tol of PathStone says.
Applicants who have workable business plans and can realistically demonstrate an ability to repay the loan will qualify for one more easily. Collateral is preferred, though not essential.
“We certainly aren’t always fully collateralized on our loans,” Van Tol says.
Even non-collateralized loans are possible, though only in smaller amounts.
“We’ve given several $5,000 loans, $10,000 loans to people who were business startups and didn’t have much savings,” he says.
The money PathStone loans out originates with the SBA, which charges interest on the funds it lends to the nonprofit. In turn, PathStone’s borrowers have to pay interest on the monies they receive; some loans have fixed rates of as much as 9.5 percent.
Despite that, borrowers are coming to PathStone in larger numbers than before. According to Van Tol, in the second quarter of 2015, the nonprofit issued 12 loans of all types, including eight microloans. During the same period of this year, it issued 22 microloans. Twelve of them were given out in Monroe County, nine of which were in Rochester.
“One of the groups that we’ve been seeing a lot of lately are the small contractors or subcontractors,” Van Tol says. “It’s just having the cash flow to pay their payroll until they get paid themselves.”
Kiva’s and PathStone’s loans can also give borrowers something besides cash.
“Once they’ve had the proven track record that their business is successful and they can repay the loan, they will then in effect graduate to a traditional financing institution,” Smith says.
At that point, an institution like Five Star Bank would be ready to talk to them.
“We answer the needs of all the business community,” says Judy Seil, the bank’s business banking unit credit manager.
Five Star’s business loans and lines of credit can come to as much as $750,000 or as little as $1,000. Its smaller loans (the bank doesn’t call them “microloans”) go out to a wide demographic.
“We’re a community bank,” Seil says. “We can have anything from a fruit stand to an auto shop to a body shop.”
Five Star requires applicants to meet the traditional requirements for loans—satisfactory personal and business credit scores and the like—though those Seil terms “a little short on collateral” can sometimes obtain the funds they need.
“A lot of times, we’ll use the Small Business Administration as a guarantor on our loans, and that lessens the risks for the bank,” she says.
The interest charged depends upon the loan involved—lines of credit bear rates of up to prime plus 2.25 percent, according to Seil. The number of small business loans Five Star makes varies year to year, but in 2015 those for $10,000 or less accounted for about 10 percent of all business loans.
Mike Costanza is a Rochester-area freelance writer.
7/22/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email firstname.lastname@example.org.