What is "microenterprise"?

Association for Enterprise Opportunity and the microenterprise development industry have defined a microenterprise as a business with five or less employees, which requires $35,000 or less in start up capital, and which does not have access to the traditional commercial banking sector.

Microenterprise in the United States

Small business is the backbone of the U.S. economy, accounting for 53% of all jobs (Office of Advocacy, Small Business Administration.) Though often overlooked, the smallest of these firms, self-employed individuals and microenterprises employing fewer than ten workers, are playing an increasingly vital role. The U.S. Small Business Administration reports that while firms of five to five hundred employees in all industries experienced a net loss of 2,065,000 jobs from 1989-1991, firms with fewer than five employees experienced a net increase of 2,624,000 jobs.

Diversity is the hallmark of microenterprise development in the United States. While the individuals and communities that need and benefit from microenterprise assistance are quite varied, most microenterprise development programs target their services to low-income people. Programs are tailored to meet the needs of specific target groups such as welfare recipients, minorities, women, the working poor, and individuals or business sectors that, for these and other reasons, lack access to credit. Some programs also target young people, refugees, homeless individuals and rural areas.

What is Microlending?

As Microenterprise Development Organizations grew, they realized traditional banks are not always willing to work with very small business loan requests or compensate for individuals whose credit may not be perfect. In response, many of these organizations developed their own lending programs. There are a variety of programs that make loans from $500 on up.

Funding for the SBA Microloan Program is at Risk

The President's FY06 Budget recommends eliminating the SBA Microloan Program, contending that the type of loans made by the SBA Microloan Program can be provided by conventional lenders using the SBA 7(a) Community Express Guarantee.

Friends of the SBA Microloan Program (including the Center for Rural Affairs) challenge these assumptions and urge Congress to continue funding this critical program for the following reasons:

1. SBA Microloans are targeted to borrowers that are un-bankable.

   While 7(a) Community Express lenders have the ability to make very small loans, they do not and cannot provide credit to the same market of entrepreneurs and small businesses that SBA micro lending intermediaries target - namely viable businesses that for a variety of reasons including no credit history or a poor credit history, lack of sufficient collateral, and limited or no business experience are unable to secure bank financing.

   Conventional lenders using the 7(a) Community Express rely on FICO credit scoring to screen potential borrowers and few of these lenders would consider a borrower with a FICO score below 680. SBA microlending intermediaries on the other hand are making loans to businesses with FICO credit scores under 500.

2. Banks cannot provide ongoing technical assistance to business borrowers.

   Lending intermediaries participating in the SBA Microloan Program provide personalized and ongoing technical assistance to their borrowers. This technical assistance is critical and enables lending intermediaries to extend credit to start-up entrepreneurs with little or no formal business experience.

   Intermediaries are able to respond to the needs of borrowers at the various stages of a business' growth and development. In many cases this includes providing pre-loan assistance in the early stages of a business' development as well as trouble -shooting and ongoing support throughout the life of the loan.

   The intensive technical assistance provided by microlending intermediaries is beyond what conventional lenders could or would provide to a business borrower. Conventional lenders participating in 7(a) Community Express provide limited technical assistance up front in screening borrowers but they do not assist lenders throughout the life of the loan.

3. Banks are SBA Microloan partners not competitors.

   Banks support the work of SBA microloending intermediaries in several important ways. First, banks are often the source of the match that SBA microlending intermediaries are required to secure for their technical assistance grants. Secondly, banks are the most common source of referrals to the SBA Microloan Program, and in fact a number of SBA microlending intermediaries get 100 percent of their referrals from banks.

   Third, intermediaries will often work with local lenders to leverage additional funding for borrowers. In many cases once a business has developed a credit record and its credit needs exceed the SBA Microloan Program limits, an intermediary will help the business access conventional bank financing. The SBA microlending intermediaries are developing a future customer base for conventional banks.

4. Terminating the SBA Microloan Program would put SBA funds at risk.

   If the President's Budget proposal is adopted and funding for SBA microloans and technical assistance is eliminated, the government would put $99 million in outstanding SBA microloans at risk. These are the funds that existing lending intermediaries currently have under management and loaned out to borrowers.

   The post-loan technical assistance provided by microlending intermediaries is critical to the success of business borrowers and enables intermediaries to maintain very low default rates while lending to businesses that conventional lenders have deemed to be 'un-bankable'. If funding for SBA Microloan technical assistance were eliminated, intermediaries would be forced to cut their lending and technical support staff, putting their loan portfolios at risk.

Prepared by Robert A Rapoza Associates for Friends of the SBA Micro Loan Program, (rapoza@rapoza.org)

Visit the Association for Enterprise Opportunities Entrepreneur Action Center to help save vital SBA Microloan funding today!