Microloans Face Budgetary Ax

SBA's micro lending program to lose federal funding in 2005

When Pearlie Green of Chicago wanted to open a catering business in 1992, she applied for loan after loan. “Every bank thought I was a joke,” she says. “You can’t get a conventional loan with your credit not being up to par and no collateral, so I wasn’t able to get a conventional loan.”

However, through the Small Business Association’s Microloan Program, designed to give startup businesses loans under $35,000, Green secured three loans in the amounts of $1,500, $3,000, and $6,000 to open Sisters’ Exotic Catering. Green caters local parties and sells her cooking at festivals, including the Taste of Chicago and Chicago Bulls Blues Festival.

Now the program that helped Green and thousands of other small business owners get started will receive no more federal funding under President George W. Bush’s 2005 budget. The SBA, citing that microloans are too costly for the SBA to administer, is steering small business owners to other programs, particularly its 7(a) program.

“In 2003, we did just over 2,400 microloans,” says Seth Becker, a spokesman for the SBA. “In the same year, [the 7(a) program provided] 23,335 loans of $35,000 or less — very small loans, basically the same territory that we’re talking about, microloan size.”

But some leaders of community organizations that make microloans available to small business owners say the 7(a) program has stricter financial qualifications than the Microloan program, and as a result, many business owners — particularly low-income minorities — will find themselves left out in the cold.

As president of the Women’s Self-Employment Project in Chicago, Connie Evans has watched her organization award microloans to women entrepreneurs since the SBA Microloan program was founded. “The kind of business owners that [the Women's Self-Employment Project] works with typically are low- and moderate-income women who don’t have access to the formal commercial institutions for capital,” Evans says. “I don’t think the women who use our program would qualify for 7(a),” she adds. “[They] don’t have the same kind of collateral that the banks would require; their credit scores are not going to qualify.”

The 7(a) program itself has seen a decrease in federal funding in recent years, but the SBA’s Becker says that statistic is misleading because the program has actually experienced an increase in funds available for loans through lenders that work with the program. He adds, “7(a)’s lending authority this fiscal year is $12.5 billion, and with that money, we are on the verge of busting every 7(a) record that’s ever existed.”

But many are skeptical that the 7(a) program will pick up the slack left by the dissolution of the Microloan program.

Green says, “There are not going to be a lot of people owning their own businesses if they cut that program out.”

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