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Micro Loans on Rise in Portland Area

United States, February 26, 2009

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Jonathan Brinckman

The Oregonian
February, 2009

Tougher bank lending rules are driving an increasing number of small-businesses owners in the metro area to a form of credit more typical of the developing world -- the micro loan.

Nigeria Crawford used her $1,000 loan from Mercy Corps Northwest to bankroll a spot at Olena's Day Spa in Portland, where she styles hair for clients like Precious Baker. Crawford hopes to tap the nonprofit for another loan some day when she's ready to open her own salon.

Tougher bank lending rules are driving an increasing number of small-businesses owners in the metro area to a form of credit more typical of the developing world -- the micro loan.

Such loans, which can be as little as $500, can be a lifeline for low-income entrepreneurs who otherwise wouldn't qualify for bank financing. But they carry much higher interest rates and have requirements -- such as mandatory business courses -- a bank wouldn't demand.

"The world has changed, banks are tightening down and micro loans are becoming a real option for people," said Mark Green, a principal with the Family Business Consulting Group in Salem. "People need money and will do what they have to get it."

Micro loans evolved as a form of economic aid in developing countries, where a small amount of capital can go a long way. As little as $20, for example, can set up a food-cart vendor in Bangladesh. Worldwide, 106 million micro loans were issued in 2007, according to the Microcredit Summit Campaign.

By comparison, the U.S. numbers are minuscule -- about 13,000 in 2007, the most recent year for which data is available, according to Elaine L. Edgcomb, director of an Aspen Institute project on the small-loan movement.

The four biggest micro loan issuers in the Portland area -- Mercy Corps Northwest, the Hispanic Metropolitan Chamber, the Oregon Association of Minority Entrepreneurs and the Oregon Micro Enterprise Network -- say demand has risen.

The biggest, Mercy Corps, recently doubled its lending staff to four. The agency -- which received 24 micro loan inquiries in January versus 11 in January 2008 -- charges 12 percent interest on its short-term loans. Most banks are now charging 5 percent or less.

"We're busier than we've ever been," said Brian Fassett, Oregon lending manager for Mercy Corps NW, an arm of the international relief agency Mercy Corps, which is based in Portland.

"Inquiries are up, anecdotally, up by 30 to 40 percent," said Valerie Plummer, executive director of the Oregon Micro Enterprise Network, which operates a statewide network of small-business services for disadvantaged entrepreneurs. "We have a backlog of about 50 inquiries now."

The Hispanic Metropolitan Chamber, which has nine micro loans out averaging $5,000, is fielding about five calls a day from small-business owners desperate for cash, said Jonath Colon, the group's business development coordinator. Last summer, his organization received about one a month, he said.

Harry DeWolf, director of the Portland office of the U.S. Small Business Administration, thinks micro loans will play an increasingly important role in the U.S. until credit loosens substantially.

"It's getting harder for startups or small home-based businesses to get financing through conventional means," he said. "Micro loans have the strong potential to give somebody an opportunity that they otherwise couldn't get."

Consider Kathy Gillis, a Portland psychologist who won approval for a $26,000 loan from Mercy Corps NW in January. Gillis, who now works in a private psychiatric clinic, will use the cash to form her own practice specializing in parent-child relationships.

Gillis went the micro loan route after first trying Bank of America and Wells Fargo Bank -- both said they didn't make loans to startups -- and then Albina Community Bank, which she said turned her down because her business hadn't existed for two years,

"I was extremely frustrated," Gillis said. "This was months and months."

Part of the problem, DeWolf said, is that banks have stepped up loan requirements over the past 18 months: It used to be that a good credit score was enough, he said, now borrowers must also demonstrate a tangible ability to pay, such as a payment history or collateral.

The heightened requirements are reflected in a sharp decrease in small-business loans. At the Portland office, the number of SBA-guaranteed loans fell 35 percent -- 381 to 249 -- in the first four months of this fiscal year versus the same period the year before.

The total amount loaned plunged 40 percent during that period -- to $41.7 million from $70 million.

The main goal of U.S. micro loan providers -- like their international brethren -- is reducing poverty. In the developing world, access to capital is often the biggest obstacle. Here, barriers can include complex business rules and regulations. That's why many U.S. providers, including Mercy Corps, offer business classes and make them a requirement for borrowers.

Nigeria Crawford took two business courses taught by Mercy Corps NW during a 22-month stint at the Coffee Creek Correctional Institution in Wilsonville, where she was serving time for assault. Before her release, she secured a $1,000 loan from the agency.

By Nov. 1 -- 12 days after her release -- Crawford leased a chair at Olena's Day Spa in Northeast Portland and began styling hair. She used the money to cover the $250 first month fee for the chair and to buy hair-styling supplies. She hopes to get another loan from Mercy Corps and eventually open her own beauty shop.

"I've been cutting hair since I was little" she said. "It's my passion."

Lori Thomas took a six-week business class from Mercy Corps before securing a $4,000 loan to start a courier business. She had been looking for work for about a year before that.

"The job market's really tough out there," she said. "This will keep me going."