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Tue August 27, 2013
Microloans Benefit Connecticut Mom and Pops
In an ongoing effort to create growth for mom and pop businesses in the state, the U.S. Small Business Administration is making capital available to Connecticut Economic Development Fund, a non-profit offering micro-loans. WNPR’s Sujata Srinivasan has more.
James Dufour owns Connecticut Carpentry in Meriden. He makes cabinets for hospitals and employs seven people. Up until the start of the financial crisis, the nearly 30-year-old business had little trouble accessing bank loans.
“But in 2008, and everything fell of the cliff, basically they just stopped lending, they didn’t even want to renew anything and at the end of the term that’s it.”
That’s when Dufour turned to the Community Economic Development Fund, CEDF, a non-profit that loaned him working capital money, and now, funds to buy this machine, sitting proudly on the shop floor. CEDF CEO Donna Wertenbach says the $1.25 million from the U.S. Small Business Administration, SBA, will help support businesses that are not bankable. But banks are not entirely out of the picture – 21 of them have invested in CEDF. This way, they cut loan-servicing costs and depend on CEDF to provide training programs to ensure loan paybacks. Wertenbach says the default rate is a record low.
“We do what the banks find it difficult to do and that’s why the banks invest in us. And because we provide this holistic support system, that’s why we’re able to have 98% of our loans being repaid.”
Many state and federal programs are targeting high-tech firms, not much is available to micro businesses. Wertenbach says this sector is just as important to the economy.
“People are always going to need a landscaper, they are always going to need a housekeeper, they are always going to need a tailor, they are always going to need a plumber. Ninety four percent of all the businesses that are in the state of Connecticut have fewer than 10 employees. Those are your mom and pops, come from the streets businesses. And that’s who we serve.”
Dean Karlan, professor of economics at Yale University, says there isn’t a lot of evidence in the U.S. on how micro loans perform, which could explain why there’s little private funding available.
“The U.S. government is saying this is a sector there that is not getting lent money but that does have significant opportunities for growth. If we can prove this works, then the for-profits will jump in, and they’ll mimic, and make money.”
Micro lending like this has some features in common with micro finance, more available in developing countries but there are also differences. Unlike microfinance, interest rates are kept relatively low, and there are no group loans, which rely on social pressures to avoid defaults. Micro lending can also involve larger amounts. The SBA funding is capped as high as $50,000, with private funds available up to a quarter million. The larger capital, says Wertenbach, along with hands on business guidance, will allow micro businesses to truly grow.