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The new candidates for this financing alternative have high credit scores and business track records
In September, Sarwat Etman, with a credit score in the high 700s, was looking for a loan and an overdraft account to help him expand Direct Furniture Source, his two-employee, $400,000 retailer in Brooklyn, N.Y. Etman's bank turned him down. That surprised him, but, he says, "I had other options. I knew someone would appreciate me." He turned to microlender Accion New York & New Jersey, which loaned him $20,000 for 48 months at 11% a year.
Microlenders are nonprofits that historically make small loans of up to about $25,000 to owners with spotty credit or slim experience. Their money comes from private donors and sometimes the government. As banks clamp down, says Sara Ignas, a spokeswoman for the Association for Enterprise Opportunity, a microlending trade group, "our members have seen an increase in demand for loans from those who a year ago could get a bank loan"—entrepreneurs like Etman.
Reports from microlenders nationwide bear her out. The Accion network, which has eight branches across the country, says it saw 905 applicants with credit scores of 700 or greater in the first nine months of 2008, a 43% jump over the same period in 2007. At Opportunity Fund, a San Jose (Calif.) microlender, 16% of applicants in the second half of 2008 had credit scores above 700, compared with 7% in the first half. And at Community First Fund in Lancaster, Pa., applicants in the second half of the year averaged a credit score 53 points higher than those in the first half. Another microlender, the Wisconsin Women's Business Initiative Corp., is receiving "four to five" calls a week from banks referring clients, up from four to five a month, says President Wendy Baumann.
Microlending, which is usually associated with loans to individuals in developing nations, was in the spotlight in 2006 after lender Grameen Bank and its founder, Muhammad Yunus, won the Nobel Peace Prize. But microlending in the U.S. has been quietly growing since the 1960s, when nonprofits began lending to women during the start of the women's movement. In the U.S., microlenders dole out an average of $7,000 to up to 20,000 entrepreneurs a year, according to the Association for Enterprise Opportunity.
As nonprofits, microlenders have a community mission to help entrepreneurs with shaky credit. But because they also must maintain their own financial stability, microlenders welcome would-be bank customers. "We're excited because these loans look great compared to a lot of what we were seeing," says Gina Harman, president of Accion. The new borrowers generally have higher credit scores and more financial-management experience than the lenders' traditional clients. They're far more likely to have adopted formal practices such as maintaining detailed bookkeeping, so most don't need the business counseling that microlenders offer. "If we can get more [high-quality] deals, we can grow our portfolio readily, and that'll allow us to do more mission deals," says Baumann. That would be good news for a wide range of entrepreneurs.
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