With banks still facing challenges, alternative sources of credit are likely to play an increasingly important role in financing small businesses. The authors describe what ACCION USA has learned as its approach to microlending has evolved.Small business - Finance ; Small business - New England ; Commercial loans ; Commercial loans - New England ; Commercial credit ; Commercial credit - New England

Gina Harman

Matthew Royles

English

Research Papers in Economics

12    Spring 2009  
 
 
 
Yankee 
Ingenuity 
Keeps 
Microfinance 
Strong
In Good Times
and Bad
Credit has been called the 
grease for the gears of the 
economy,  the  oxygen  of 
free  enterprise,  or  as  Fed-
eral Reserve Chairman Ber-
nanke puts it, the lifeblood 
of our financial system. But 
for businesses with five or 
fewer  employees,  access-
ing  credit  can  be  difficult. 
Whether it’s because lend-
ers don’t handle small loan 
requests or because borrow-
ers  have  less-than-perfect 
credit  scores,  many  of  the 
22  million  microentrepre-
neurs  in  America  cannot 
access  capital  from  banks 
or get appropriate forms of 
financial training.1 
Monica Landrum works at the business she 
and Todd Warfield started with a loan from 
ACCION USA. Photograph: Rohanna MertensCommunities & Banking    13
 
 
Yankee 
Ingenuity 
Keeps 
Microfinance 
Strong
by Gina Harman and Matthew Royles
ACCION USA 
     Fortunately, microenterprise develop-
ment  programs,  now  entering  their  third 
decade, have been able to be both lender 
and mentor to these smallest of businesses. 
Their support is especially important today 
because microenterprises create jobs in bad 
times as well as good. Consider that in 2002, 
when the unemployment rate reached an 
eight-year  high,  microenterprises  created 
nearly 1 million new jobs.2 And in 2005, 
microenterprises represented more than 60 
percent of the total number of businesses. 
Tweaking the Model
Massachusetts  microenterprise  develop-
ment  got  off  the  ground  in  1990  with 
Cambridge-based  Working  Capital  Inc. 
Low-  and  moderate-income  microentre-
preneurs  were  offered  Working  Capital’s   
technical assistance and microloans of up   
to  $5,000  under  the  peer-group  group 
model (small groups of individuals assume 
shared  responsibility  for  one  another’s   
loan repayments).3
In  1991,  ACCION  International 
launched a microenterprise pilot program 
in Brooklyn, New York, that would become 
the U.S. ACCION Network. Now operating 
in 18 cities, it has disbursed nearly a quarter 
of a billion dollars in microloans, primarily 
to low- and moderate-income microentre-
preneurs. Like Working Capital, ACCION 
New  York  began  by  making  microloans 
to  groups.  But  it  ultimately  determined 
that an individual-lending model was bet-
ter  suited  to  U.S.  borrowers,  who  often 
resisted  peer  collateralization,  the  sharing 
of sensitive information, and the perceived   
inequities in loan amounts. The individual 
model was also seen as doing a better job of 
preparing borrowers to enter the traditional 
credit system.
Working  Capital  arrived  at  a  similar 
conclusion. It found that peer group net-
working and mutual support were benefi-
cial, but that participants often resisted the 
responsibility of managing the loan repay-
ments of others, frequently strangers.4 By 
the  time  Working  Capital  merged  with 
ACCION  USA  in  2001,  it  had  already 
switched  to  the  individual-lending  mod-
el. The  New  England  program  has  since   
disbursed  $10  million,  which  (according   
to an internal study by The Social Com-
pact  and  ACCION  USA)  has  supported   
the employment of 1,467 people and has 
had  a  historical  repayment  rate  of  better 
than 91 percent. 
Microenterprise  loans  range  in  size 
from  $500  to  $25,000  and  are  priced 
between  prime  and  subprime  sources  of 
credit. Interest rates start at 12.5 percent 
and are capped at 17.5 percent. The high-
er rates offset the significant costs—includ-
ing  write-offs—associated  with  even  very 
small  loans.  For  a  microlender,  a  $2,000 
loan costs roughly the same to disburse and 
service as a $50,000 loan. Microlending is 
also time-intensive because of the diligence 
required to ensure that loans help and not 
burden	 clients.	 Loan	 officers	 spend	 extra	
time with each client to ensure payments 
are manageable and that principal amounts 
are  appropriate.  In  many  cases,  loan   
officers  also  provide  free  technical  assis-
tance, such as credit-repair advice, to clients   
and nonclients alike. Even at the above inter-
est rates, no U.S. microenterprise develop-
ment lender has yet achieved 100 percent 
self-sufficiency. 
That  is  why  innovation  and  econo-
mies of scale are so valued. To control costs, 
portfolio  risk  needs  to  be  carefully  man-
aged,	and	it	is	important	to	have	a	flexible	
but  comprehensive  underwriting  process 
that includes collecting documentation on 
clients’ cash flow and ability to repay the 
loan. And to help clients build strong credit 
and eventually move into prime-rate loans 
from mainstream institutions, microlenders 
should report loan repayment to the three 
major credit-reporting agencies.
Innovations: Striving 
for Self-Sufficiency
Because the costs associated with operating 
a microfinance program are so high, a recur-
ring theme among practitioners is the need 
to find savings through technological inno-
vation. To that end, in 2006 ACCION USA 
piloted a character- and credit-scoring mod-
el. The model facilitated a rapid response by 
segmenting potential borrowers into three 
categories, each one associated with a range 
of	interest	rates,	a	maximum	loan	amount,	
and the associated documentation needed.
Another innovation to build scale and 
sustainability was an Internet microlending 
platform.  After  ACCION  USA  launched 
the first one in 2005, microentrepreneurs 
anywhere in the United States could apply 
online,	 execute	 promissory	 notes	 through	
an  electronic  signing  system,  and  receive 
loan  disbursements  via  an  Automated 
Clearing House (ACH) deposit. The system 
dramatically reduced the time spent on loan 
renewals. Since ACCION USA made the 
first Internet microloan to an East Boston 
bodega owner in 2005, it has lent money in 
45 states and Puerto Rico. Although Inter-
net lending means working remotely, delin-
quency and write-offs remain in line with 
the overall portfolio.
Partnerships are a good way to reduce 
marketing	costs	and	expand	a	lending	foot-
print. Microlenders may partner with banks 
to get customer referrals, financial support, 
or  loan  capital.  Some  choose  to  collabo-
rate with municipalities. Contracting with 
microenterprise development programs has 
helped community and economic develop-
ment departments in cities such as Boston, 
Somerville,  and  Lawrence,  Massachusetts, 
to tap federal grant funding for microen-
terprise  development.  Community-based 
groups  that  work  with  business  owners, 
women, and immigrants also connect cli-
ents with microlenders.
 14    Spring 2009
Additionally, large corporations understand 
the challenge of running a business and may 
be willing to add economic and community 
development to their portfolios of socially 
responsibility	investments.	In	one	example,	
ACCION  USA  launched  a  loan  fund  in 
partnership with the Boston Beer Compa-
ny to support New England microentrepre-
neurs in the food and hospitality industries. 
Microentrepreneurs who receive loans from 
the  “Samuel  Adams  Brewing  the  Ameri-
can Dream Micro-Loan Fund” also receive 
counseling and mentoring through a finan-
cial education program.
Current Challenges 
Although, like much of the country, low- 
and  moderate-income  microentrepreneurs 
have struggled in the recession, nonprofits 
lending to these borrowers generally escape 
the  widespread  charge-offs  (the  value  of 
loans removed from the books and charged 
against loss reserves) that many subprime 
lenders have seen. Careful management of 
risk helps with weathering financial down-
turns.	ACCION	USA,	for	example,	main-
tains a prudent debt-to-net assets ratio of 
roughly 4:1, and although it saw delinquen-
cy	grow	in	2008,	the	rate	did	not	exceed	
manageable levels.
In fact, for ACCION USA, the most 
visible impact of today’s economy has been 
a decline in loan disbursements from 2007 
levels.  Prospective  borrowers  may  hold 
mortgages that are adjustable and subprime 
or may carry too much credit card debt. A 
lack of available collateral and reduced cash 
flow may also make lending to microentre-
preneurs problematic. 
As a result, technical assistance, cou-
pled  with  microloans  when  appropriate, 
has become increasingly important. In one 
case, ACCION USA assisted a Boston-area 
entrepreneur  whose  business  had  recently 
grown  from  four  to  12  employees.  With 
her money tied up in receivables, she was 
having trouble getting paid, which hurt her 
cash flow. ACCION USA provided a loan 
to make payroll and also linked her to pro 
bono legal help provided by Greater Boston 
Legal Services. 
Countering the 
Credit Crunch
Federal intervention into the U.S. banking 
system is helping to relieve the pressure on 
banks resulting from bad debt. However, in 
light of the continued challenges facing both 
banks and borrowers, a resurgence of wide-
ly available credit is not a given. Alternative 
sources  of  credit,  including  microlenders, 
community development financial institu-
tions (CDFIs), and peer-to-peer lenders are 
likely to play an increasingly important role 
in  financing  small  businesses  both  today 
and in the long term. 
Gina  Harman  is  president  and  CEO  of   
ACCION  USA  in  Boston,  Massachusetts, 
where Matthew Royles is associate director 
of resource development.
Endnotes
Elaine  L.  Edgcomb  and  Joyce  A.  Klein,  “Opening 
1 
Opportunities,  Building  Ownership:  Fulfilling  the 
Promise  of  Microenterprise  in  the  United  States” 
(Washington, DC: The Aspen Institute, February 2005).
See http://www.microenterpriseworks.org. 
2 
Nancy C. Jurik, 
3  Bootstrap Dreams: U.S. Microenterprise 
Development in an Era of Welfare Reform (Ithaca, New 
York: Cornell University Press, 2005).
Nazli  Kibria,  Susan  Lee,  Ramona  Olvera,  “Peer 
4 
Lending Groups and Success: A Case Study of Working 
Capital,”  Journal  of  Developmental  Entrepreneurship 
(April 2003).
Consider that in  
2002, when the  
unemployment rate 
reached an eight-year 
high, microenterprises 
created nearly  
1 million new jobs.
Store owners Leonardo Clavijo and Leticia Mantilla were able to begin their business with a loan from ACCION USA when no traditional bank would give them a 
loan. Photograph: Rohanna Mertens
This	Communities	&	Banking	article	is	copyrighted	by	the	Federal	Reserve	Bank	of	Boston.	The	views	expressed	are	not	necessarily	those	of	
the	Bank	or	the	Federal	Reserve	System.	Copies	of	articles	may	be	downloaded	without	cost	at	www.bos.frb.org/commdev/c&b/index.htm.

Microfinance in good times and bad: Yankee ingenuity keeps microfinance strong

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Microfinance in good times and bad: Yankee ingenuity keeps microfinance strong

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