Private enterprise loans a boost to entire nation

By Gilbert Peterson

It is said venture capitalists invest in prospective start-up enterprises when greed overcomes their fear. Naturally, they put their money into big opportunities, typically those requiring an investment of more than $US3 million. Small loans take as much effort to assess and administer anyway.

But governments such as the Clinton administration in the United States and Tony Blair's in Britain, are finding the private sector's experience with start-up loans valuable for small companies, and to address social equity objectives as much as to further grow a nation's gdp.

While President Clinton glows in the applause drawn by the robust 5 per cent plus growth of the US economy last year, largely due to the success of venture capitalists, he has also had them under study, to mimic their success elsewhere in the economy.

He hosted a micro credit summit in Washington last month, shortly before the Government delivered its Budget, which included a doubling of Government investment in this type of programme.

The Budget will lift the overall loan funds available to the Federal Government's Small Business Administration (SBA) by more than $US170 ($320) million to a total of $US994 million, 21 per cent more than for the current fiscal year.

The muted policy objective is to incubate more thriving large businesses from among the thousands of would-be entrepreneurs in the US and so stave off unemployment and welfare dependence.

The ways of rampant capitalism are being harnessed to boost those with the drive for financial independence.

The SBA claims companies such as America Online, Federal Express, Intel and Nike and other household name businesses began with the help of an SBA loan or two.

"Each of these companies benefited from SBA financial assistance at a crucial stage in its development," says Aida Alvarez, administrator of the SBA.

"One measure of the success of our investments in small business is that Intel alone contributes more in tax revenue each year than the SBA's entire budget."

Aida Alvarez points out that the funding levels announced last month for the SBA would raise its capacity to guarantee loans to give equity assistance. It will also provide for a doubling of the number of lenders available under the Microloan programme.

Most of this extra loan funding is targeted for delivery through microlending programmes of the sort promoted by First Lady Hillary Clinton.

She describes microlending as "a very important tool for economic and social development," and cites their high repayment rates of up to 99 per cent.

Loans typically range from $3000 to $25,000, less than bankers find worthwhile to process.

But they are administered through the usual banking infrastructure, with the banker's eye on the fact they do not count against a bank's reserve requirements, and another firmly on the rule that banks bear the costs when default rates rise above 20 per cent.

SBA agencies nationwide help prepare enterprises to become loan-ready. They also work jointly with local Chambers of Commerce and Community Development Centres in assisting an enterprise reach the dollar-for-dollar matching contribution required to access a Federal loan.

"Everyone in the community has an interest in the venture's success," said Rudy Ortiz, director of the SBA's office in Corpus Christi, Texas.

"Banks don't like to make loans under $50,000. It's not worth it for them."

They will do it as the Government obliges them to assist with community-related projects.

"But the banks positively baulk at figures under $25,000. This is where the SBA comes in," said Mr Ortiz.

"We have stipulations to provide start-up loans for ethnic minorities, women in business, and for older people, in two parts: preparing companies so they can get a loan, and for technical assistance when approaching banks.

"The financial institutions recommend the loans and the SBA approves them. The loans are processed by, and repaid to, the financial institution.

"Because SBA loans are guaranteed, an institution may relax some part of its usual lending criteria, to extend the term of the loan, or if the collateral differs from what is usual for that institution."

Mr Ortiz pointed out the present SBA Microloan programme has been running only as a prototype over the past three years; last August it became "permanent".

This year's large Budget increase signals official sanction.

Ironically the SBA intervention in the low end of the development loans market also follows where the private sector has gone before.

It owes its origins to private development initiatives undertaken by such organisations as Accion International.

Accion, a transplant from South America, has been operating in the US since 1991. Since then it has demonstrated seed loans to micro enterprises can pay off in the real business world.

The organisation has won a toehold now in six socially stressed US city districts and, unlike its Government-backed lookalikes, has carved a niche amongst micro entrepreneurs who have neither collateral nor credit. It draws funds from banks, foundations and philanthropic individuals.

Chief executive of Accion Texas, Janie Barrera, says the organisation's lending criteria is based mainly on character assessment. That, and a daily check with clients if required, to ensure businesses stay on track. She has loaned out about $US4 million since1994, losing just $US30,000 of it.

Accion sees its role as a lender of last resort, ahead of pawn-brokers and money-lenders which are its clients' erstwhile alternatives.

The organisation is less coy than the Government about its motives too. "We are a social justice organisation dedicated to fighting poverty by helping hardworking people help themselves," says Janie Barrera. "Accion does not offer handouts, but a hand up."

At 16 per cent per annum interest, the hand-up does not come cheap, three points above the banks' top rates. Still, Accion's clients are reputedly loyal and grateful. "We have to be careful about what we ask for from our client family, because we will be given it," Ms Barrera says.

* Gilbert Peterson, a New Zealand writer, is based in Texas. He can be contacted at Gilpetered@aol.com