America's small-business owners are finding themselves cut off from the money they need, as banks drastically reduce credit limits and freeze lending. True to the entrepreneurial spirit, however, they're finding a new solution — from the third world.
In Asia, Africa and South America, microloans have helped lift millions of people out of poverty. These specialized loans — mostly from nonprofit organizations — help people without access to traditional banks start businesses and develop self-sufficiency.
It's an idea that translates well to an economy where traditional lenders have gotten skittish.
When The Money Stopped
Back in 2004, Ryan Fochler took over a dog-walking business. After a few successful years, he decided to purchase a store and expand into a full-service pet care center in Arlington, Va.
"Everything was just kind of lining up really well, and it made me confident to go ahead and sign my name on that lease," he tells NPR's Guy Raz.
But in 2008, while renovating a 7,000-square-foot space for his new business, the market started to take a hard downward turn.
"Just before we opened our doors is when it was technically labeled a recession."
That's when his bank began to change its tune. Fochler's access to loans and credit dried up almost entirely. He almost folded before his store had even opened.
He wasn't the only one in this situation. MIT economist Simon Johnson, author of the book 13 Bankers, says a lot of other small businesses found themselves out of luck, too.
"The banks in this country have taken a beating," Johnson says. "Even the banks that think they're going to survive and do OK are really hunkered down. They're being very careful about who they lend to, and they see small business as relatively risky."
Turning A Profit On A Nonprofit's Dime
After being turned down by bank after bank, Fochler came across the Latino Economic Development Corporation, a nonprofit microlender based nearby in Washington, D.C.
Fochler is not Latino, but he was told that was OK. The LEDC works with all kinds of local businesses that have been turned down by traditional banks. Their goal is to help fledgling, independent businesses get on their feet.
They don't operate exactly like microlenders in the developing world, some of which issue interest-free loans and let recipients repay whatever they can, whenever they can.
In contrast, American microlenders charge competitive interest rates, and the loans must be repaid on time. Defaulting on a microloan has the same consequences as defaulting on a bank loan.
The LEDC issues loans ranging from $500 to $50,000. Often in the past, those who came to the LEDC to apply for a microloan had little or no credit history.
But Rob Vickers, director of lending at the LEDC, says the profile of his average microloan applicant changed dramatically during the credit crisis.
"I was seeing clients that I couldn't believe weren't bankable coming in, and thinking, 'Wow, this person has a credit score in the mid-700s, their business existed for more than two years, and yet, not only are they not able to obtain a bank loan, but they're having their credit line slashed.'"
That was the case with Fochler, Vickers says. The LEDC extended a lifesaving $50,000 loan that kept Fochler's business, Dog Paws and Cat Claws, afloat.
Since then, Fochler has taken out and paid off several loans from the LEDC.
Not Just A Loan
Beyond the money, Fochler says he has also received invaluable help planning for the future of his business from the LEDC.
"They want to make sure you understand your business," he says. Fochler feels the LEDC offers constant support. "Even just going over there, when I make my monthly payments — I like to drop them off in person, say hi. Some of their employees use our services. They talk about us, they push us. So they're almost a built-in marketing team for us."
Microlenders take the success of the businesses they work with personally. They have to. They are required by law to keep the loans they issue on their books. If a business fails and can't repay a loan, they take the hit.
So microlenders tend to take a lot of time and care to make sure the businesses they select for loans succeed.
But Vickers — who started working in microlending with the World Bank in Latin America — says his goal isn't to compete with banks: it's to work in tandem with them.
"The goal of nonprofit microlenders like LEDC is to ultimately graduate our clients to a commercial bank," he says. "We don't want to undercut the private sector."
Room For Expansion?
Ryan Fochler is hoping to "graduate" to a bigger bank loan soon. His business is steadily growing. Today he employs 30 people, and he's gone from 75 customers in 2004 to 2,300 today.
He says he has a lot more he wants to do with his business — like add a retail center in a portion of his shop that is now empty.
"Now that grooming and training is going full-force, it's amazing how quickly things are taking off," he says.
Fochler is so pleased with his microloan experience that he testified in Washington last fall. He urged the Obama administration and Congress to channel more money to microlenders so they can support more small businesses like his.
It is still unclear how Washington will respond. No concrete steps have taken place yet to expand government funding to microlenders.