Starting Small

from Urbanite Baltimore

By: Lionel Foster

One day in November 2005, a truck driver named Jean Bonaney walked into the office of an organization called Acción USA in Miami’s Little Haiti community. Acción has offices or affiliates in eight states, and its parent organization, Acción International, operates in twenty-five countries, but the Little Haiti office has just one staff member, Joann Milord, who greets clients in the Sant La Haitian Neighborhood Center.

Bonaney wanted a loan. His wife wasn’t working, so his job driving a cement truck was the only income for his family of six. Their budget was tight. “Sometimes we couldn’t get clothes,” he remembers. At $16 per hour, his take-home pay varied with the number of shifts he was given. During a good week, after a few 3 a.m. wake-ups, he might clear $800.

Bonaney had dreams of running his own concrete outfit. He’d studied business at a local community college and with the help of the Enterprise Community Center he’d written a business plan for T.J. Concrete of Miami. The idea was to run a smaller, nimbler operation that could pour high beams, slabs, and driveways in areas that larger trucks, like the one he drove every day, couldn’t reach. When shifts at his day job were scarce, he could fill in the gaps with his own jobs.

With no savings to tap into, Bonaney needed access to credit. He had a decent job but no credit history—no mortgage, no auto loan, nothing. He’d been turned down for every credit card for which he’d applied—seven, by his reckoning. With a credit score of zero, he couldn’t even get a department store charge card.

He hoped Acción could help. The organization provides small, short-term “Credit Builder” loans designed to help people get a foot in the door. At a 17.5 percent annual interest rate, they beat many credit cards and the typical “payday lender,” which extracts triple-digit rates from borrowers who fail to repay loans by their next payday. Acción gave Bonaney a $500 loan, and, after he paid that off, a second loan for $750. As Bonaney paid the monthly $100 installments, his credit score improved. In 2007 he graduated to Acción’s small business loan program and borrowed $3,000 to cover the cost of insurance for T.J. Concrete and repairs for one of his cement pumps. After about a year working with Acción, he says his credit score reached 700, what many lenders consider the low end of the high-score range, and this January T.J. Concrete opened its first office.

Bonaney is what many people refer to as a microentrepreneur, a small business owner employing one to five people. And Acción USA is a microlender providing small loans to current and would-be entrepreneurs, who, because of problems with credit or low income, might otherwise be turned away by banks uninterested in lending such small sums.

Microcredit gained international attention in 2006, when Bangladeshi economist Muhammad Yunus won the Nobel Peace Prize for his work fighting poverty with small loans. That same year, he told Time magazine that microcredit could “halve total poverty by 2015.” Global poverty will become so uncommon, he said, that “we’ll create a poverty museum in 2030.” Yunus’ Grameen Bank has continued to have dramatic success in the developing world, and Grameen America opened its first office in Queens, New York, last fall. But there are many questions about the future of microcredit in the United States, specifically whether the Grameen model or something like it can work in this country.

Yunus got his start in 1976 when he lent a group of subsistence basket weavers $27 out of his own pocket. Within a year each had paid him back and he was borrowing money to help others. In 1983, special legislation designated Grameen as an independent bank. Since then the bank has distributed approximately $6.5 billion to more than 7 million borrowers in 81,000 Bangladeshi villages. Grameen reports a 98 percent loan recovery rate, which compares well with the recovery rate for personal loans in the United States. It took its last donation in 1998 and is now a for-profit enterprise owned predominantly by its borrower members.

Part of Grameen’s success is due to the way it has positioned itself within a country full of tight-knit villages. Ninety-four percent of Grameen’s recipients are women, many of whom have used their newfound access to credit to raise their own social status and better care for their children. Borrowers must be part of a group of typically five people. No collateral is required, but anyone thinking about defaulting on one of the weekly payments, often delivered during public meetings, has her reputation to consider. Lastly, a Grameen loan is not just about the money. Grameen is also the hub of a social movement. Borrowers are strongly encouraged to adhere to “The Sixteen Decisions,” a manifesto that, along with guidelines on basic public health measures and nutrition, includes pledges to maintain small families and spurn marriage dowries.

It’s difficult to imagine such a system succeeding in the United States. Indeed, it hasn’t. As recently as December 2006, there were 133 million outstanding microcredit loans worldwide, according to the Microcredit Summit Campaign, which tracks the industry. But the industry’s footprint in the United States is still microscopic: Less than one-tenth of one percent of those loans were in North America and Western Europe combined. In Maryland, Urbanite could find only one domestic microlender—Maryland Capital Enterprises in Salisbury—and a handful of county-run small business loan funds.

“I don’t know of anyone in the United States who’s reached scale,” says Gary Woller, a microfinance expert and president of Woller and Associates, a development consulting firm in Sandy, Utah. “Scale” is shorthand for the large volumes of microcredit borrowers that would increase returns, decrease the average cost of servicing each loan, and make microlenders less dependent on charitable donations. (In the United States, microloans can vary from as little as $100 to several thousand dollars.) In 2003, Woller and fellow researcher Mark Schreiner published a paper in the journal World Development that laid out a number of impediments to America’s microcredit industry.

For starters, while some low-income Americans are denied access to mainstream credit options such as bank loans or even credit cards, so-called predatory lenders often fill the gap. Creative lenders continue to find ways around a Maryland law that puts a 33 percent cap on the annual interest for loans of less than $2,000. There’s also the question of motivation. In countries like Bangladesh, the alternative to starting a small business might be starvation. In the United States, wage jobs are much more abundant, and even a low-paying one can, at the very least, help a person pay for necessities. Factor in welfare and unemployment benefits and it means there’s more of a cushion between America’s poor and absolute destitution.

These differences may explain the contrast between Acción’s success in Latin America and some of the challenges it faces here. Acción International made its first loans to small-scale entrepreneurs in Brazil in 1973 and saw such a large and steady return that, in 1992, it helped found Bolivia’s BancoSol, the first commercial bank in the world devoted solely to microenterprise. It came to the United States in 1991, when it began a pilot project in Brooklyn, New York. But fifteen years later, Acción USA counted only 6,049 active borrowers.

Alternatives to entrepreneurship leave organizations like Acción USA a smaller pool of potential clients than their developing world counterparts, and within this pool, lenders have to choose carefully to ensure a decent rate of return. To make it work in the United States, Acción has had to alter at least one aspect of its approach, and this change has shut out some of the most needy. Acción USA requires collateral, or, at the very least, a co-signer for each loan. Jean Bonaney leveraged the pickup trucks he used to transport cement as collateral when he applied for his small business loan. Loan officers also ask for a bank statement and home utility bill as some indication of a borrower’s cash flow. Such requirements would not be onerous for most people, but they can represent too great a hurdle for anyone without a steady source of income and a fixed address. Even Credit Builder loans require proof of income. “We look for low-to-moderate income entrepreneurs,” says Elizete Groenendaal, Acción USA’s vice president of marketing. “We need them to have some kind of credit established.”

In Acción USA’s case, as with other domestic microlenders, most of the clientele are immigrants. “A lot of people come from countries where the bank system isn’t stabilized,” says Acción USA’s Joann Milord. They may not even have a bank account. So microcredit is, for many, an introduction to mainstream U.S. financial services. And this may prove to be one of the industry’s main functions in the United States: Microcredit might not turn America’s most destitute populations into business owners, but it could help set people like Jean Bonaney and those once considered un-bankable on a clearer path to financial security.

—Lionel Foster