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With Squeeze on Credit, Microlending Blossoms

Amanda Keppert is convinced that she would have lost Mandy’s Korner, her hot dog stand in San Jose, Calif., if she had not received a type of loan that is more common in the third world than in the United States.

Last year, as fewer people ate out and layoffs mounted in Silicon Valley, sales plunged more than 60 percent at the once-thriving Mandy’s Korner. “My business was drowning and I was afraid it would go under,” Ms. Keppert said. While she picked up catering work at a local concert site, it wasn’t enough to pay her expenses. She had invested all of her savings in the business, and she did not want to see it go under.

But her loan applications were rejected repeatedly at banks in San Jose. Then she found Opportunity Fund, a local microlender that has teamed up with Kiva.org, one of the best-known international microlenders. Kiva, which has lent more than $150 million in 53 countries, had just begun a pilot program lending to business owners in the United States.

Through Kiva, Ms. Keppert obtained a $6,500 loan that she has three years to pay back and that carries a 6 percent interest rate. She used the money to buy an ice maker, a generator to save on propane costs and large signs to advertise her business.

Before the economic collapse, microfinance — the granting of very small loans, mostly to poor people — was a concept most closely associated with the developing world. But tight credit and the recession have increased the demand for smaller loans in the United States, giving microlending a higher profile and broadening its appeal. Both Kiva and Grameen Bank, a microfinance group that is based in Bangladesh and was started by Muhammad Yunus, winner of the Nobel Peace Prize for his groundbreaking work in microlending, have widened their lending to Americans.

In addition, last year’s economic stimulus bill granted $54 million to the Small Business Administration for lending and technical assistance to microlenders. Cities like San Francisco and New York have expanded or introduced their own microfinance programs. This year, loan applications at many of the country’s 362 microfinance outfits, some of which have been quietly operating since the 1980s, have more than doubled. Many of the groups expect them to keep rising as other financing streams remain tight for small companies.

“Everyone is knocking on our doors, even those with good credit,” said Galen Gondolfi, a senior loan counselor at Justine Petersen, a microfinance group based in St. Louis.

Since the recession, credit cards are harder to come by, real estate values remain low — making it harder to borrow against home equity — and banks have tightened standards. “The banking system has lots of money, but they don’t have the kinds of applicants that you want to risk someone’s savings for,” said William Dunkelberg, chief economist of the National Federation of Independent Business and chairman of Liberty Bell Bank, based in Evesham, N.J. Small-business owners need to be reminded “that banks are not venture capitalists,” he added. “We’re not in the business of funding great ideas.” (Also read: Small Business Job Engine Remains Stuck In Low Gear)

Most banks, large or small, do not bother granting business loans of less than $50,000 because there’s not enough profit to balance the risk. By contrast, microfinance programs in the United States typically lend $35,000 or less to small businesses with five or fewer employees. They charge more than traditional banks, of course, with interest rates ranging from 5 to 18 percent.

Unlike mainstream banks, which focus on an applicant’s credit score, the programs consider passion and commitment to the business. Most require that loan recipients take workshops on money management, marketing and business plans, and some have income caps.

What leads microlenders to work with some of those applicants is a distinct mission. Most are not trying to make a profit; they are trying to alleviate poverty.

“For us to make money, we’d have to charge 15 to 20 percent on our loans, “ said Jeff Reynolds, director of a program in Lyons, Neb., called REAP, which charges a maximum of 7.25 percent.

Early this year, Craig Adams, owner of a wine shop in St. Louis, Vino Vitae, tried to get a $50,000 loan to open an adjoining restaurant and event space. He was turned down first by his longtime bank, which said he had too much debt, and then by a second bank. A local venture capitalist insisted on fees that Mr. Adams was not willing to pay.

He was finally referred to Justine Petersen, and in March, he received a $15,000 loan with a 12 percent interest rate. He has 10 years to repay the loan. He has had to scale back, but he is using the money on architectural plans and inventory. “It’s not the greatest way to go,” said Mr. Adams, 43, “but it’s the only way to go.”

Heavy demand for loans persuaded the Grameen Bank, which has lent $9.4 billion through more than 2,500 of its branches worldwide, to open four new branches in New York and one in Omaha in the last two years, under the name Grameen America.

It also has plans to open offices in San Francisco, Boston, Washington, and Charlotte, N.C. Grameen, a nonprofit, tries to help people who fall below the poverty line and do not have access to mainstream banking, offering first-time loans of as much as $1,500 with an interest rate of 15 percent on a declining balance. In the developing world, established businesses generally receive loans of about $380. Obviously, loans of $1,500 can only go so far in a developed nation, but they can fix up a delivery vehicle. They can also buy a street cart for a vendor, a sewing machine for a tailor or hair dyes for a hairdresser.

Unlike other microlenders, Grameen requires its borrowers to join a group of entrepreneurs that meets weekly. Borrowers are also required to save a percentage of their weekly income — at least $2 — and to pay a portion of their loan’s principal and interest.

Kiva, the organization that backed Ms. Keppert’s hot dog stand, works much like a middleman. It teamed up with microfinance groups that upload profiles of individual entrepreneurs and their loan requests to www.Kiva.org. People browse the profiles, decide which ones, if any, they would like to lend money to, and then Kiva disburses the money through the microlender (the Opportunity Fund in Ms. Keppert’s case). The individual lenders get their money back when a business owner repays the loan.

The pilot program that Ms. Keppert took part in has been available in California and New York since last summer. “It seemed very timely,” said Premal Shah, president of Kiva. “People talk about buying local — why not lend local? It’s a personal stimulus package if you’re the working poor.”

Overseas, Kiva borrowers can seek loans of up to $3,000, while in the United States, borrowers can take out loans of as much as $10,000. Since its American debut, Kiva has helped lend $900,000 to 137 American companies. The average American loan is about $5,600 and has a term of about two years and three months.

“People are compelled to do something in their backyard,” said Gina Harman, president and chief executive of Accion USA, a microlender and partner in Kiva’s American pilot program. “Suddenly, giving $1 to someone in Ghana isn’t as important as giving to someone here.”

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