A Helping Hand
More lending programs offer aid for aspiring entrepreneurs with nowhere else to turn
By AMY CHOZICK
Staff Reporter of THE WALL STREET JOURNAL
November 29, 2004; Page R9

When Renee Turning Heart lost her $7-an-hour custodial job due to a back injury, she decided to start her own business selling quilts. But Ms. Turning Heart, a single mother of five and a Lakota Indian living on the Cheyenne River Sioux Lakota Nation in South Dakota, had no collateral, no job and no credit record.

Three times, she tried to get a loan at a local bank — and was turned away. “Everything came to a halt when the bank said no,” says Ms. Turning Heart, who signed up for welfare in 2001 after the third rejection. Finally, she took one of her quilts to her local Tribal Business Information Center, which offers seminars for aspiring entrepreneurs.

The center referred her to the Trickle Up Program, a New York-based nonprofit that provides small grants and business-development assistance to applicants with low income. Trickle Up offered her $700 in grants, enough to buy fabric to get her business rolling. The group also required that she put her money into a checking account, allowing Ms. Turning Heart to establish a banking relationship. Within two years, her growing business and her bank account gave her the credentials she needed to borrow $3,000 from a community-based lender.

She now takes home as much as $1,200 a month from selling quilts and works as a receptionist at the tribal business center. “My family couldn’t survive without the money I get from selling quilts,” says Ms. Turning Heart, who left the welfare rolls in May 2003.

Lending organizations are finding that groups that have traditionally had limited access to financing are a growing market. While the number of small businesses in the U.S. is growing about 8% per year, minority-owned small businesses are growing about 20% per year, according to the latest Census Bureau data. The Center for Women’s Business Research reports that from 1997 to 2004, the number of firms that are majority-owned by women increased by 17%, nearly twice the increase of all privately held firms.

To help meet the growing demand, the Small Business Administration’s 7(a) loan-guarantee program, which provides backing on bank and nonbank small-business loans, guaranteed 30% more loans to African- and Asian-Americans, 28% more to Hispanics and 25% more to women in the year ended Sept. 30 than it did in fiscal 2003. And while federal antidiscrimination laws prevent banks from targeting specific minority groups for loans — because all banks insured by the Federal Deposit Insurance Corp. must observe equal and fair lending laws — some banks are reaching more minorities anyway.

To get around the rule, banks like Bank of America Corp. and Wells Fargo & Co. try to target minorities and women by offering outreach programs in underserved communities. But when it comes to the actual loan, all loan applicants must be treated as equals. At Bank of America, 40% of its SBA loans go to minority-owned businesses. Wells Fargo offers free multilingual business-development seminars at branches nationwide and has lent more than $22 billion to minority- and women-owned small businesses since 1995.

Role of Microlenders
Some community-based lenders and nonprofit organizations have special lending programs, too, such as Trickle Up, which gives out $200 to $500 grants, and Acción International, an international nonprofit that lends as much as $50,000 to minority, women and low-income entrepreneurs with a promising business plan.

Such so-called microlenders — nonprofit intermediaries that make loans of as much as $35,000 — can get around antidiscrimination rules because they aren’t FDIC-insured and generally go unregulated, although most do receive some federal funds. For example, a federal grant might say that a microlender that targets female entrepreneurs can’t discriminate against men, but the organization might still advertise only in women’s magazines and push its program to women. The Association for Enterprise Opportunity, an Arlington, Va., nonprofit that represents microenterprise organizations, is contemplating adopting some standards for its industry, but for now there are no regulations.

For people with low income and no credit record, minorities, immigrants or people with disabilities, finding the money to start a small business can seem like an impossible feat. But local business-development centers, chambers of commerce or one of the SBA’s branches can help find an alternative lender and offer tips on how to get started.

“People who are aspiring entrepreneurs want to do the job they’re doing — but without their boss,” says Armando Ojeda, president and CEO of the U.S. Hispanic Chamber of Commerce in Washington, D.C. “But that requires a very different skill set. We can help them acquire these skills.”

The SBA reaches some of its neediest applicants through its MicroLoan Program. This program provides funds to community-based microlenders, which give technical assistance to small businesses and individuals that have trouble accessing capital. Banks also may refer would-be business owners to a microlender, many of which also advertise on radio shows, in community newspapers and via the Internet.

Microlenders are often more willing to take risks than a traditional lender. Lane MicroBusiness, for instance, is a Eugene, Ore., nonprofit that makes loans of $500 to $10,000 mostly to disabled or Hispanic entrepreneurs in Lane County, Ore. The group charges interest rates of 6% to 12%, and considers a candidate’s business, current capital and even character in making its decision. Last year, about 20% of its loans weren’t repaid, about double Lane’s usual default rate. By contrast, just 6% to 7% of SBA loans go bad, while banks are willing to tolerate a default rate of 0.5% or less.

Specialty lenders may not require credit or collateral, but they do still want to see a solid business plan and some related experience. “If someone wants to open a flower shop because they got laid off, but they don’t have a business plan or experience, a loan would be a disservice,” says William Burrus, chief executive officer of Acción USA, the Boston-based domestic arm of the international lender.

Another microlender, Count Me In Inc., a New York-based firm that targets female entrepreneurs nationwide, tries to reach women through advertisements in Real Simple, Self and other women’s magazines. The organization, funded by private, corporate and government donations, allows new businesses to apply online (at www.count-me-in.org3) and decides whether to make a loan based on a person’s background and reason for going into business, says Nell Merlino, chief executive and co-founder.

To Make Dough
“If a woman comes to us and wants to be a baker, then we want to know if she’s been cooking ever since she could see the top of the stove,” Ms. Merlino says. “Most banks just want three years of financial history and collateral.

“We’re able to supply people not only with money, but with a vote of confidence,” she says. “We say, ‘Here you go, we believe in you and think you can make this work,’ and nine times out of 10, we’re pleasantly surprised.”

Since its founding in August 2000, Count Me In has made loans to more than 500 women in all 50 states. Interest rates range from 8% to 14%, depending on the type of business and the applicant’s income. Count Me In says at least 90% of the loans are repaid. Ms. Merlino acknowledges that a 10% default rate is relatively high, but, she says, “It’s worth the extra risk to get these people the help they need.”

In 2001, when Beatriz Ramos started the Dancing Diablo animation studio in Brooklyn, N.Y., she had $60,000 in credit-card debt and legal immigrant status. But the SBA couldn’t help the Venezuelan-born Ms. Ramos because she wasn’t a citizen.

After hearing a radio ad for Count Me In, Ms. Ramos approached the firm for a $3,500 loan to buy a new computer. She was approved. Then, less than a year later, she applied and qualified for another Count Me In loan, this time for $10,000. After Ms. Ramos demonstrated success with the second loan, Count Me In persuaded American Express to lend her the $40,000 she needed to make payroll for her 12 full-time employees. Dancing Diablo now counts Kraft Foods, MTV and Steve Madden shoes among its clients, and Ms. Ramos says she is steadily paying off her debt.

Mr. Burrus, of Acción USA, says he’s trying to destroy the stereotype that minorities and the poor are a credit risk. Funded by government money, private donations and investors such as churches, his nonprofit will lend $500 to $50,000 to worthy recipients.

Time for Training
“You name it, we finance it,” says Mr. Burrus, ticking off a few of the day-care centers, jewelry makers, hair salons and desktop publishing companies Acción has helped over the years. “But we can’t be all things to all people,” he says.

Acción will refer applicants who aren’t ready for a loan to a community college, a chamber of commerce or a local SBA office for training. “We focus on financing,” Mr. Burrus says.

Of Acción USA’s 300 loans per month, more than 80% go to Hispanics and African-Americans and about half to women. The loans carry interest rates of 12% to 14%, and the organization reports that 95% of the $100 million that has been loaned out over the past 10 years has been repaid.

The Abilities Fund, a nationwide program based in Iowa City, Iowa, and funded in part by the Department of Education, serves as a business development center for disabled entrepreneurs. The fund is not a lender itself, but it guarantees a small number of loans each year, and links disabled entrepreneurs with local community lenders who might have large-print or Braille applications, are proficient in sign language and have wheelchair-accessible offices.

“Sometimes it’s more than a financial-access problem,” says Mark Nolte, senior business consultant at the Abilities Fund. “You have banks that don’t want to make a loan, and a person who can’t physically access the bank.”

Ms. Chozick is a staff reporter in The Wall Street Journal’s New York bureau

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