Micro Lending for Macro Jobs
by Francis P. Koster, Ed.D.
Right around 9 percent of workers are unemployed. This does not tell the entire story, as only 4.2 percent of college graduates are unemployed, compared to 14 percent who did not finish high school. North Carolina has the seventh highest rate of unemployment in the country, at 10.5 percent for September.
Simultaneously, banks and credit unions have basically reduced lending to anyone except those with the highest credit ratings. Even entrepreneurs with college educations and good credit ratings find it difficult to get a loan, and those entrepreneurs without higher education, and owning a bruised credit history, are finding it impossible. And our whole society loses, because without available capital, job development slows or stops.
Now consider this: Small firms accounted for 65 percent of the net new jobs created between 1993 and 2009. They represent 99.7 percent of all employer firms, employ half of all private sector employees, pay 44 percent of total U.S. private payroll, are 52 percent home-based and produce 13 times more patents per employee than large firms. Clearly, we need more of them!
Creating new jobs requires capital — even setting up a lawn-cutting service requires mowers, edgers and trucks. A new nail salon requires money for chairs and feet soaking tubs.
As my colleague Brooke Adams found while researching this topic for TheOptimisticFuturist website, most banks do not lend businesses amounts smaller than $50,000. How do we as a society create a source of loan funds for emerging small businesses that don’t fit large lenders’ criteria?
Answer: Micro lenders. Found in San Francisco, San Antonio, New Orleans, Charlotte and many other cities, organizations called micro lenders exist for the sole purpose of helping small businesses get going.
Micro lending refers to the practice of lending small amounts to qualified entrepreneurs and small business. Often done by a non-profit organization established just for this purpose, the loan maker has different business terms for the borrower to meet than those of the typical multistate bank.
The first difference is that the micro lender does not intend to repackage the loan with others and resell it on Wall Street. Instead, the loan is small, for short duration and is owned and managed locally.
The second difference is the criteria used to qualify for the loan.
As a society we have gone from an era when people were loaned money based on the borrower’s character, family reputation and track record to an era today where loan committees make loans based on credit ratings and number of times folks were late paying their credit card. What has gotten lost is the very important metric of character, and the ability to learn from past mistakes — something neighbors, fellow business people and friends are in a better position to assess. Until several decades ago, this played a larger role in the loan making process than it appears to today.
In discussions I’ve had with active members of these micro lending organizations, a common theme has emerged — that “it takes a village to raise a new business.” This village is created by the requirement attached to the loan that the borrower be adopted, trained and supervised by lending agency staff and sponsors who have proven themselves in finance and business. Micro lending is not just a financial transaction — it is economic and human development.
The Opportunity Fund (http://www.opportunityfund.org/) is one organization that provides micro lending in the U.S. It operates in many states and has an online application process. The vast majority of its loans are between $1,000 and $10,000. Another well known micro lender is ACCION USA (http://www.accionusa.org/), which has made more than 19,000 microloans totaling more than $119 million since inception in 1991.
To educate the public about the benefits of micro lending, these two organizations joined forces recently to hold a Microfinance USA conference. The two organizations report “a business survival rate twice the national average, repayment rates that rival those of mainstream lenders and a boost in local job creation for each loan provided.”
There are many micro lenders in the United States, including the Michael Scott Mater Foundation in Charlotte, which is deeply committed to borrower education and training as a condition of granting a loan.
We don’t have to act like economic matters are out of our control. You can approach your friends about starting a local fund for micro investing, or speak to existing micro lending funds and ask them how you can help them do outreach, marketing their resources in your own community. Or you could deposit some of your own money with a micro lender so they can expand their good works while saving our economy. The record shows you are likely to earn a higher rate of return than you currently receive, in addition to creating a stronger local economy.
We are not powerless. We can join together, and put our money where our mouth is. And our communities will be the better for it if we do.