Bush is expected to have a tough time ending tiny federal loans that are lifelines to first-time entrepreneurs, particularly minorities and women

Micro-loans become big deal

March 22, 2005|By NEW YORK TIMES NEWS SERVICE

Since the beginning of the 1990s, thousands of aspiring entrepreneurs have moved away from unemployment or welfare by borrowing a few thousand dollars - even as little as $500 - to set up their own small business.

Several years ago, Diane Barrett Holloway, a single mother and out-of-work pastry chef, used a $5,000 loan from a local women's economic agency in Silver City, N.M., to start a restaurant in an old storefront, cooking for customers with a scavenged pizza oven and serving them on a half-dozen mismatched tables.

"That money made the difference," said Holloway, whose restaurant, Diane's, is now thriving, with 30 employees. She plans to open two more restaurants next year. "Without it, I wouldn't have had a chance to get my business going."

Now the modest financial backing that Holloway and other women and minorities have used to create jobs for themselves and others may soon be shut off.

The Bush administration has proposed ending the financing for the Small Business Administration's micro-loan program, which provides seed money and technical assistance to startups and low-income entrepreneurs.

Small-business owners like Holloway were wooed in the recent election by both parties, which hailed them as driving the U.S. economy by creating millions of jobs across the country.

But now that budget time is here, a political debate is boiling over administration proposals to scale back small-business programs.

The micro-loan program, which lent almost $33 million to 2,400 entrepreneurs in fiscal 2004, is one of 10 agency programs set for termination under the president's proposed 2006 budget.

The program's overall financing is minuscule compared with the Small Business Administration's giant 7(a) guaranteed loan program, which backed $12.7 billion in loans in fiscal 2004 to nearly 75,000 businesses.

But its advocates argue that a micro-loan is almost always the essential first step to success for women and minorities, who usually do not have the money, credit history or collateral to borrow from a commercial bank.

Defenders of the administration's proposed cutbacks, including the agency's administrator, Hector V. Barreto, say that, in reality, the flow of funds to small businesses will be little affected. They say the government will save money by not having to pay for the technical assistance that the law requires for entrepreneurs receiving micro-loans.

There is little chance that Congress, which has resisted previous administration efforts to prune the agency's budget heavily, will approve the proposed Bush administration cutbacks wholesale.

Some influential Republicans have been vocal in their opposition, including Sen. Olympia J. Snowe of Maine, the chairwoman of the Committee on Small Business and Entrepreneurship. Still, advocates of the program say the proposals are a serious threat to a program that has an exemplary record of success.

Women have received the greatest share of micro-loans, where the Small Business Administration furnishes seed capital for lending by intermediaries, usually local nonprofit groups.

According to congressional data for fiscal 2004, more than 60 percent of such loans went to women, and the program had a default rate of just over 1 percent. The government also spent $15 million on technical assistance, delivered by nonprofits, that includes classroom training and on-site visits to help loan recipients start and sustain their business venture.

Teri Wade, who used a $5,000 micro-loan to open a salon in Herndon, Va., offering cellulite-reduction treatments, said that the hands-on assistance she received was crucial to her startup.

"I would have made major mistakes," she said, "like not getting liability insurance, or giving away too much of my business to get financing. Without that advice, I wouldn't be in business."

The Small Business Administration maintains that micro-loans, which average $13,600, can be folded into its guaranteed loan program, where the average loan is $15,300. The agency said that about a third of guaranteed loans were under $35,000, indicating that they were borrowings by startup firms.

Critics said that recent changes in the way the guaranteed loan program was run, especially higher fees for borrowers and lenders, have already crimped the ability of small businesses to get loans. Moreover, they say, the fees and paperwork make processing smaller loans uneconomical for many banks.

In October, the Small Business Administration's guaranteed loan program was shifted to fee-only, meaning the program receives its support from fees charged to borrowers and banks, and does not have yearly congressional appropriations to make up any financial shortfall. As a result, the fees have risen, to as much as double on some loans.

"The borrower's costs are now double for the smaller loans of up to $150,000," said Richard Proudfit, chief executive of the Gateway Business Bank, a small independent bank in Cerritos, Calif., that lends to small businesses.

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