Ka Wai Ola - Office of Hawaiian Affairs, Volume 10, Number 6, 1 June 1993 — Credit: Are you getting your$? [ARTICLE+ILLUSTRATION]

Credit: Are you getting your$?

Microenterprise advocate offers model for small business financing

by Patrick Johnston People who want to start a business but have no assets face a catch-22: They need money for startup but they don't have the collateral for a bank loan. To build up the collateral they need money. Beverly Smith, executive director of the Association for Enterprise

Opportunity (AEO), an umbrella group that supports the activities of more than 40 microenterprise (small business) loan fund programs, has

found a way to break this cycle. Smith, who spoke at a series of OHA and DBEDT-sponsored microenterprise workshops at the end of April (see stories page 13), is part of a rapidly growing movement to provide loans to "nontraditional" borrowers in a nontraditional but far more accessible way. Explains Smith, "We target low ineome individuals with limited access to training and resources and open channels to funds that would otherwise be blocked." The process begins with funding, either by a private foundation, a bank, or government

agency, to create a microenterprise loan-fund program. With these resources, the microenterprise lending group offers financing to individuals in the community who need money to start a business but don't have the co!lateral to secure a loan from a bank. Often these individuals are poor, are

unfamiliar with financial and busin e s s p r a e - t i e e s , and risk 1 o s i n g

any money that comes their way. The lending group overcomes this by putting on training programs that provide borrowers with business know-how, and by offering the money in small increments. Loan recipients take the bare minimum necessary to get set up and, as he or she learns the tricks of the trade, ean borrow more. Recipients then ean avoid the demoralizing effects of bankruptcy or failure that might be caused by taking on a large, unmanageable amount of money. "I know that when somebody borrows a lot of money and then declares bankruptcy it ean have a

crippling affect," says Smith. "With a microenterprise loan they never have to carry too mueh of a debt burden." At the same time the borrower

g a ī n s . valuable I financial j and bus- j i n e s s | experienee. "Some of the people I h a v e worked w i t h n e v e r h a d m o r e than 100 dol lars in the b a n k a n d d i d n ' t e v e n k n o w how to manage a

checking account," explains Smith, adding, "these loans allow them the opportunity to learn about business but not get into financial trouble." Another method AEO uses to ensure loans get repaid and recip-

ients stay diligent is a eommunal approach to borrowing that involves lending money to small groups. Those in the group most ready to receive the money begin

the process of borro wi n g m o n e y and making paym e n t s . The others eann o t rece i ve their loan until the f i r s t loans are r e p a i d . T h i s f o r e e s the original recipients and the rest of the group to w o r k

together to make sure the debt is paid off. The approach is modeled on one developed by an Americaneducated Bangladesh economist who believed that if he used the community (in his case, small

Bangladeshi communities) as eollateral it would be possible to provide loans to low ineome individuals. The community would provide the peer pressure to make sure that the loan recipient stayed on his toes and got the loan paid off. This nontraditional approach removes lending obstacles to individuals or groups with lowineome because no collateral or underwriting is required. Individuals who want to borrow money have to write a business plan and commit to the plan, but they do not have to meet the stringent conditions of the banks. The process encourages the growth of small communitybased businesses, providing jobs and ineome for people living in the community as well as creating a healthy, financially stable, neighborhood environment. "It's good to own something, to feel a part of your community. It helps the community grow," Smith believes. "Schools, businesses, all benefit. ... the money stays in the community and is recirculated." Smith began her work with poor, largely African American women in a Chicago ghetto as part of the Woman's SelfEmployment Project, a microenterprise loan fund program. This continued on paee 14

"There are many people eapahle of taking on a loan that don't have the financial service available to them." Beverly Smith

Smith: Believes credit is a right photo by Patrick Johnston

Beverly Smith

continued from page 12 offered both training and start-up money for entrepreneurs as well as group loans. She helped set up numerous small businesses, including childcare operations, carwash stands, record stores, even truck brokers. Funding for the group eame largely from the Mott Foundation, a private group engaged in a variety of philanthropic projects. With the proliferation of such microenterprise loan fund projects in the early 1990s the Association for Enterprise

Opportunity was established to oversee the activities of the different groups, try to implement public policy, and promote exchange between group members. Smith became executive director at that time. Says Smith, "I've done a lot of work in the traditional banking world and it stopped making sense. ... There are many individuals capable of taking on loans that don't have the (financial) services. Credit is a right. You've got to have access."