Loans for the little guys

Starting a business was the last thing on Jason Salfi's mind in 1996, when he sat on a dock in Sausalito, Calif., and started making "long board" skateboards.

All Mr. Salfi wanted was a board to replace the outdated 1970s model he'd been using, which, he recalls, "was just a big oak plank."

Little did he know that he was on the way to becoming a "micro- entrepreneur" success story - joining the ranks of a growing number of Americans who have become part of a "microenterprise" movement

The movement is based on grass-roots financial principles developed in the 1960s to help the poorest of the poor start their own businesses in third-world countries. America's microenterprise sector boasts an array of entrepreneurs, including immigrants, women, senior citizens, and small inventors.

"It's amazing who's involved," says Mark Cousineau, executive director of the Connecticut Community Investment Corp., a nonprofit microloan lender. "It could be your neighbor. It could be you."

Small microlending programs, run by churches and other socially active organizations, have been around in the US for at least the past 20 to 30 years.

But the movement didn't begin to formalize until the early 1990s, when several programs took shape. For example, the Small Business Administration's microloan program, which has loaned some $200 million since it began in 1992.

According to a 2000 study commissioned by Accion USA, a nonprofit organization and the largest microlending network in the US, there are some 13.1 million microentrepreneurs across the country.

By definition, a microentrepreneur runs a business with fewer than five employees, has a strong personal involvement in the business, and likely has no credit record or assets.

Microenterprises generally require less than $35,000 to launch, and microloans usually run from $500 to $50,000.

Banks routinely reject loan requests from such businesses because the costs involved are too high and the returns too low, leaving many would-be entrepreneurs locked out of the traditional financial system.

Microenterprise lenders are filling this gap. These nonprofit institutions use private or government funds, or a mix of both, to help the smallest of small entrepreneurs who would otherwise have no access to capital.

Microlenders charge interest rates higher than those charged by banks - around 12 percent to 16 percent - but they also provide technical assistance in how to plan, market, and manage a business.

"We're really providing a hand up to people who are on the bottom of the economic ladder," says Christianna Beebe, director of communications for Accion USA. "The building blocks that so many of us consider fundamentals, such as savings, insurance, and assets, are out of reach for many of these people."

In Salfi's case, his business grew gradually out of making skateboards for his friends. He built "long boards," designed to bomb down hills at speeds as high as 65 m.p.h. As word spread about his product, he began selling a few to San Francisco stores, eventually starting Comet Skateboards with his best friend, Jonathan Reese.

"We financed it with money out of our own pockets, we had a couple of thousand dollars," says Salfi of the business's early days. "We'd be excited if we sold 20 boards ... in a month."

With a small loan from a friend and a credit card borrowed from a girlfriend, the two gradually grew the business up to two employees and sales of 50 to 60 custom boards a month, plus another 200 to 300 made for other manufacturers.

But when they were ready to expand again in 2001 and needed money to do so, they ran smack into the problem faced by most microentrepreneurs: They were turned down by a bank for a loan because they didn't have enough of a credit history or enough assets in their business.

Through the grapevine, Salfi heard that the nearby city of Oakland was offering tax incentives to businesses willing to relocate there.

In addition, when he called the Oakland Business Development Corp., a nonprofit group contracted by the city to administer loans and aid to small businesses, he learned that microloans were also available.

With the OBDC's help, Salfi and his partner qualified for a $40,000 loan, obtained the money in less than 90 days, and moved their business from its old 2,000-square-foot location to a 7,000-square-foot warehouse in Oakland.

"I don't think we'd still be in business without them," says Salfi. "We needed the capital to move to Oakland and we couldn't have pulled it off without them. They were an asset in advising us, and in providing us with the capital."

The OBDC loan enabled Salfi and his partner to take the business one step further. They leveraged the $40,000 loan into a $225,000 loan through another City of Oakland program, and used those funds to attract another $675,000 from private investors.

With production of Comet brand skateboards totaling several hundred a month, the partners recently stopped making boards for other companies and now concentrate solely on refining and developing the Comet brand.

Their aim is to raise another $250,000 to help them reach their goal of selling 1,500 boards a month by next year.

They also hope to expand into a clothing line and capture a 3 to 5 percent share of a fiercely competitive skateboard market. (There are some 100 skateboard companies, but fewer than 10 make their own boards.)

Salfi's plans for positioning his product include an aggressive ecologically conscious approach based on the fact that his boards are made from environmentally sustainable materials such as woods from "specially managed and certified" forest.

"I hadn't planned it would turn out like this," he says, looking back to when he started making a few boards by hand. "But I always had the dream to pull something like this together."

Microenterprise advocates say that that's the point - allowing people to fulfill their dreams.

While Salvi is doing so on a relatively large scale, many microentrepreneurs work on a much smaller basis. But they still still manage to make substantial gains.

A five-year study by the Self Employment Learning Project of the Aspen Institute, found 57 percent of microenterprise businesses surviving after five years, with average revenues increasing 27 percent and profits doubling in that period.

Some 72 percent of poor microentrepreneurs increased their household income during those five years, and more than half, 53 percent, moved above the poverty line.

"The microloan program both supports the American dream and makes that dream available," says Jody Raskind, chief of the microenterprise development branch of the SBA. "It's a grass-roots development program that allows for the development of business and the development of personal wealth based on self-employment.

"It's one everyone can look at." he adds, "and see something positive from it."

Juana Perez can't read or write. But she definitely knows her numbers.

A former migrant farm worker, she wanted a better life for herself and her husband. So Ms. Perez started a business in 1991 with $50. She bought a few cases of soda and set up shop inside her trailer home in a poor unincorporated section of McAllen, Texas.

Perez sold the sodas to children in her neighborhood. With her profits, she invested in more sodas and snacks, and began making jello and tortillas for sale as well.

"Ever since I was a little girl, I just loved business," says the Spanish-speaking Perez through an interpreter.

But when she asked a bank to lend her a few hundred dollars to grow the business a few years later, she was turned down. It wasn't until Perez met a loan officer from Accion Texas, a nonprofit microlender, that she found the help she needed.

With a $500 loan from Accion in 1998, she bought an adding machine and more inventory for her store. Her excellent repayment record - with loan payments often made with the quarters children used to pay for treats - qualified her for a second loan of $1,200 in 2000. She used that money to build a small carport and buy picnic tables so that her customers could eat outside and not in her kitchen. Last November, she took out a $3,500 loan to add a small building, which now serves as her store. Its inventory ranges from yo-yos and fans to sodas and bicycles.

"Because of Accion, I've been able to grow my company," she says. "Nobody ever had wanted to help me before. I started out small, and look what I've got now. I'm an example of what can be done."

For as long as she can remember, Eve Wolk wanted to own a store.

With a degree in fashion merchandising and marketing from the Fashion Institute of Technology in New York, she felt confident as she cashed in some investments and opened a small boutique called "Chatchka's" on Chicago's north side in 1999.

"Here I am thinking I had everything figured out, and what I discovered is you don't really know anything until you're doing it," says Ms. Wolk.

Soon after launching her store, she discovered how difficult it was to get a business loan from a bank. "I had no credit whatsoever," she says. "I went from bank to bank to bank to bank. And no one would lend me any money."

Through a local women's business development center, she learned about Accion Chicago, and its microenterprise loan programs. With a business plan in hand and support from loan officer Alan Lane-Murcia, she received a $10,000 loan at 12 percent interest. That loan helped her establish a credit record, which in turn allowed her to go to her own bank and secure a $25,000 loan at a more competitive interest rate. She then paid off the Accion loan and had $15,000 left to build her business and inventory of accessories and clothing.

As Wolk's business expanded, doubling each year (annual sales now total just under $300,000), she continued to build her relationship with Accion. Not only does the organization make repeated loans to clients with good repayment records, it also helps them develop other business relationships. In Wolk's case, Accion stepped in as a second on another bank loan of $30,000 and provided the young entrepreneur with a $15,000 loan last fall to buy inventory for the holiday shopping season. She also has a close relationship with her loan officer, drawing regularly on his experience and insights.

"You can't get that at a bank," says Wolk. "You just can't get that kind of support anywhere else.... I'm not saying this isn't hard work, but it's more rewarding than anything I've ever done."

Back in 1996, social worker Reggie Hayes decided he had to do something after the day-care center at a local YMCA in New Haven, Conn., closed, leaving many low-income mothers in the lurch.

"I knew there was really a need here for affordable day care for mothers," he says. "I had always thought of opening a center, but when that crisis came along, I decided it was time."

Mr. Hayes found a good site in the basement of an apartment complex in a low-income neighborhood. Using several thousand dollars of his own money, he rehabbed the room and opened a center licensed by the state to care for 18 children. The center expanded gradually, becoming licensed for 25 children, and eventually grew so popular, says Hayes, that he knew, "I really needed to move."

Although he'd been turned down by several banks, on the grounds that his salary as a social worker wasn't enough to cover his own needs and to run a day-care center, Hayes says: "I just kept on plugging. I knew I'd get a loan somewhere."

Eventually, a bank connected him with the Connecticut Community Investment Corp., a nonprofit organization that works as the lender for a special state program which offers microloans to day-care providers - the first of its kind in the nation.

CCIC wound up giving Hayes a $25,000 loan in 2000. The money enabled him to lease and renovate an empty building, creating a bright, colorful space for 43 children. What's more, says Hayes, CCIC recently volunteered to help him buy the building so he can accommodate even more children.

"That kind of sent chills through me," says Hayes of CCIC's offer. "They came to me, and said, 'We want you to buy, and we're going to finance the purchase for you.' That isn't something that just happens in life every day."