Micro Lending for Macro Jobs

by Francis P. Koster, Ed.D.

Right around 9% of workers are unemployed.ⁱ This does not tell the entire story, as only 4.2% of college graduates are unemployed, compared to 14% who did not finish high school. North Carolina has the 7th highest rate of unemployment in the country, at 10.5%.ⁱⁱ

Simultaneously, Banks and Credit Unions have basically reduced lending to anyone except those with the highest credit ratings. Even entrepreneurs who have 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% of the net new jobs created between 1993 and 2009.ⁱⁱⁱ 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.^iv Clearly we need more of them!

Creating new jobs requires capital - even setting up a lawn cutting service requires acquiring mowers, edgers, and trucks. A new nail salon requires money for chairs and feet soaking tubs.

As my colleague Brooke Adams found when she was 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 business's which don't fit the large lenders criteria?

Answer: Micro Lenders. Found in San Francisco, San Antonio, New Orleans, and Charlotte, and many other cities, organizations called Micro Lenders exist for the sole purpose of helping small business get going.

Micro Lending refers to the practice of lending small amounts of money 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 multi-state bank.

The first difference is that the Micro Lender does not intend to repackage the loan along 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 borrowers 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 - which, until several decades ago, played a larger role in the loan making process than it appears to today.

In discussions I have 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 already proven themselves in the world of 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.. They operate in many states, and have an on-line application process.  The vast majority of their loans are between $1,000 and $10,000.^v   Another well known micro-lender is ACCION USA (http://www.accionusa.org/), which has loaned over $119 million in over 19,000 microloans since inception in 1991.^vi

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.”^vii

There are many Micro Lenders in the United States, including the Michael Scott Mater Foundation in Charlotte N.C., 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 that you are likely to earn a higher rate of return than you currently are, 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 the better for it if we do.

To assist the Editor in fact checking