The old adage “you can only get a loan when you don’t need it” sums up the experience of many entrepreneurs trying to secure business capital.
Small business owners — and especially women business owners — know more than anyone how tough it can be to secure capital. After all, it wasn’t that long ago when women had to take their husbands into a bank to talk to a loan officer.
Women business owners report facing the same frustrations over and over again: The venture capitalists want a huge piece of their business in exchange for capital, and the banks—although they say they want to lend to small business—have big business assets requirements. Perhaps most frustrating is the all-too-frequent comment of lending institutions that small loans just aren't worth the trouble of processing them.
That is where the microloan program run by the U.S. Small Business Administration comes into play. The microloan program provides very small loans to start-ups, newly established firms, or growing small businesses. Under this program, the SBA makes funds available to nonprofit community-based lenders (intermediaries) that, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $10,500, according to the SBA.
The Bush administration has proposed a budget for SBA’s Fiscal Year 2006 of $592 million, which represents a 13 percent decrease from the agency’s 2005 request and a 26 percent decrease from the 2004 request. For 2006, the SBA requested zero appropriations for the microloan program.
The SBA has stated that the microloan program should be terminated and the loans under this program should be approved through the 7(a) Community Express program instead. The borrowers currently receiving microloans, however, have insufficient credit profiles or assets to qualify for 7(a) loans. This point was clearly emphasized at a Feb. 17 SBA budget hearing before the Senate Committee on Small Business and Entrepreneurship. Testimony was provided demonstrating that microloan borrowers have credit qualities, collateral, and financing needs that are significantly different from those required in the 7(a) program. If the microloan program is terminated, these borrowers will find it difficult or even impossible to secure financing to fund their new or established small businesses.
A recent National Women’s Business Council analysis of SBA loan program performance over the past five years found that 45 percent of microloans went to women-owned businesses in FY2003 — significantly more than any other SBA loan program.
If compared to the other lending programs for small business administered by the SBA, it stacks up very well on a jobs-per-dollar comparison. According to the SBA Office of Advocacy in 2004, the microloan program created or retained one job for every $3,608 loaned and the default rate was just over 1 percent. The members of Women Impacting Public Policy believe that when a program generates jobs it should be viewed as an investment rather than a strict cash outlay.
Given the fact that there are 21.5 million microenterprises in the U.S. (companies with five or fewer employees) and employment by microenterprises represents 17.2 percent of all private (non-farm) employment in the U.S., it is no wonder that in 2004, the SBA made $33 million in loans through this program.
According to the Association for Enterprise Opportunity, whose members administer this program, technical assistance comes with microloan lending. Many hours of technical assistance are given to those who are applying and receiving microloans, which helps to ensure the success of the business!
The SBA’s microloan program serves as an important source of start up capital to women entrepreneurs. The SBA argues that the microloan program can be rolled into some of their other loan programs, but the truth of the matter is that banks participating in the other loan programs simply will not make the loans, regardless of guarantees.
Fortunately, the Senate clearly understands the value of the Microloan program. It recently restored $78 million to the 2006 SBA budget, with some of that funding earmarked for microloan funding. (This funding was added, beyond what the administration had requested, by unanimous consent.) Now, it is up to the House to show the same leadership. Congress should continue funding this important lending program for all small business owners and especially women entrepreneurs.
Terry Neese is the president and co-founder of Women Impacting Public Policy, an advocacy group for women in business, based in Washington, D.C. WIPP has more than 505,000 members nationwide.