Small business owners who can’t get traditional bank loans are increasingly turning to nonprofit microlenders such as ACCION USA and Opportunity Fund
By Karen E. Klein, BusinessWeek

During the credit crunch, small business owners rejected by traditional lenders found growth funding through domestic microfinance organizations geared to helping the poor and disenfranchised. Loan applications have increased in the past two years at 66 percent of microfinance groups surveyed by the Aspen Institute, a policy and research organization. While only a few microlenders were able to accommodate a majority of new applicants, those more likely to get funding were “people who were very strong small business owners who in the past would have received financing, but because the banks pretty much shut down, they did not,” says Elaine Edgcomb, the director of Aspen’s microenterprise FIELD project, which tracks domestic microfinance and conducted the survey.

Domestic microfinance will never replace traditional business lending, nor should the industry drop its primary goals of social improvement and poverty alleviation, says Sean Foote, a venture capitalist and professor of microfinance at the University of California, Berkeley. The industry, which reported lending an aggregate $68.6 million in FIELD’s survey from financial year 2008, represents only a drop in the bucket of the U.S. credit market. But it is growing fast and has taken on new importance during the recession…

Microlenders Helping Small Business

Although U.S. microenterprise development has been around since the 1980s, there are only a handful of organizations that make more than 100 loans a year, including ACCION USA, Kiva, and Opportunity Fund.The industry got a publicity boost two years ago, when Grameen America, an offshoot of Bangladesh-based Grameen Bank founded by Nobel Peace Prize winner Muhammad Yunus, began operations in Harlem and Brooklyn. In mid-May, Grameen opened a Manhattan branch.

But most of the 700 institutions identified in FIELD’s survey are tiny nonprofit and quasi-governmental organizations that operate on a local or regional level, working one-on-one with disenfranchised populations. Most provide business training and technical assistance; about 400 also do small business loans, Edgcomb says. A typical maximum loan is around $35,000.

An even smaller amount can be a vital lifeline for a small company struggling to move to the next level. Simonida Cvejic, executive director of Bay Area Medical Academy, a medical technician school in San Francisco, says the $10,000 initial loan she got from San Jose-based nonprofit microlender Opportunity Fund was crucial. Cvejic survived war in her native Yugoslavia, won grants to study abroad, and worked in Goldman Sachs’ (GS) Silicon Valley venture capital distribution office before starting her own business in 2005. Her school, which brings in $1 million in yearly revenue, now trains 400 students annually, many of them recently laid off or former welfare recipients…

To read full article see BusinessWeek