New York City entrepreneur Rhoda Plotkin had an idea for her company’s line of LifeField Buckwheat-brand flour, cookies, and pancake mix she couldn’t wait to try out. But there was a catch: The 13-year-old firm, R. Plotkin and Associates Inc., needed $3,500 for new equipment and packaging to create a test batch of the still-secret confection.
Ordinarily, the company, which sells to more than 50 grocery and health-food retailers in the Northeast, could have tapped its $10,000 credit line for the funds. But the line was terminated at the end of 2008, despite a perfect payment record, when Plotkin’s lender abruptly stopped offering services to small businesses. Now she was unable to find a bank willing to make such a small loan: Most institutions she tried were uninterested in loans below $500,000.
Today, Plotkin’s new machinery is humming and her buckwheat product is ready for test marketing. She got the loan she needed last summer from one of the country’s biggest nonprofit microlenders, Accion USA.
“The banks don’t care about companies like mine,” says Plotkin, whose company expects to bring in $45,000 this year. “But organizations like Accion are devoted to getting small businesses on their feet.”
Funding Grows for Microloans
Microlending began in the 1970s with the Grameen Bank in India, which made loans as low as $50 to small groups of entrepreneurs in developing countries that had no hope of receiving typical bank financing. The concept arrived on U.S. shores about 20 years ago and has grown into a lending niche that makes $500 million in small loans annually, according to Accion’s Laura Kozien.
Essentially, a microloan is a small loan — sometimes as small as $100 — typically distributed by specialized microfinance institutions. They fill a critical need for small businesses and microbusinesses that don’t need or can’t afford or can’t qualify for a larger bank loan.
In the past 18 months, microlenders have garnered additional funding support as they strive to help the many small businesses, such as Plotkin’s, that have gotten the cold shoulder from traditional lenders during the economic downturn. Here’s a look at new programs and funding initiatives:
- Citi announced a $200 million microloan initiative in May. The Communities at Work Fund has since loaned $60 million to small businesses through lending partners across the United States. The loans carry a low 4.35 percent interest rate.
- International microfinance Web portal Kiva.org began offering loans of up to $10,000 to U.S. businesses in June 2009, and it has facilitated $1 million in domestic loans to date. Recently, Kiva expanded thanks to a $1 million grant in October from credit card giant Visa. Kiva President Premal Shah says Visa’s infrastructure grant will enable Kiva to solicit an additional $10 million in loan funding.
- The federal stimulus bill of 2009 added $47 million in new loan money to the Small Business Administration’s Micro-Loan program. SBA Microenterprise Development Branch Chief Jody Raskind says much of that money has been distributed to SBA’s loan partners in the field and is available for lending now.