February 16, 2009

SMEs Using Microloans to Overcome the Credit Crunch

Many of us understand how entrepreneurs in developing nations use microloans to finance their businesses, but we may not be aware that small and medium-sized enterprises (SMEs) in industrialized nations such as the United States are using microloans as a similar tool to facilitate business growth. During the past few weeks, BusinessWeek has published two articles about how SMEs are securing microloans in order to start or expand their business operations from nonprofit organizations and the opportunities that exist for smaller community banks as larger financial institutions struggle to survive.

In Louise Lee's article dated February 13, 2009, "As Credit Dries Up, More Owners Seek Microloans," she writes about how a retailer in Brooklyn, New York, with a high credit score, opted to obtain a small loan in the amount of $20,000 from a local nonprofit lending organization. As larger lending institutions fight to remain solvent, nonprofit lending organizations are providing microloans in the average amount of $25,000 to SMEs. Although microlenders traditionally provide loans to borrowers who lack high credit scores or business experience, borrowers with stronger credit histories are tapping into the same microlenders as an alternative to working with larger banks.

Ms. Lee explains, "The Accion network, which has eight branches across the country, says it saw 905 applicants with credit scores of 700 or greater in the first nine months of 2008, a 43% jump over the same period in 2007. At Opportunity Fund, a San Jose (Calif.) microlender, 16% of applicants in the second half of 2008 had credit scores above 700, compared with 7% in the first half. And at Community First Fund in Lancaster, Pa., applicants in the second half of the year averaged a credit score 53 points higher than those in the first half. Another microlender, the Wisconsin Women's Business Initiative Corp., is receiving 'four to five' calls a week from banks referring clients, up from four to five a month, says President Wendy Baumann."

Several of my colleagues are clients of large financial institutions and complain that customer service has diminished as these institutions "try to stop the bleeding." Stacy Perman’s article published on January 27, 2009, "Community Banks Increase Small Business Loans," focuses on how community banks are taking a larger role in offering loans and lines of credit to small business owners as larger banks struggle. Ms. Perman writes, “As the credit freeze continues and the recession deepens, many community banks, generally defined as having less than $10 billion in assets, are reporting an uptick in loans and credit lines to small businesses.”

Community banks see an opportunity to develop lending relationships with SMEs. As Ms. Perman explains, "Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. 'Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,' says Christine Barry, Aite's research director. ‘They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.'"

Another advantage of working with smaller community banks is they generally provide personalized service to their customers compared to their larger counterparts that provide exceptional service to a more select group, namely, high net-worth clients. Smaller banks carry another advantage as their "loan officers often have an intimate knowledge of the local area and its businesses."

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