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Micro-Loans Rescue Small Businesses

 New America Media, News Report, Anuja Seith

SAN JOSE, CA —At Dizo Cleaners, a family-owned drycleaner in San Jose, neatly pressed shirts and dresses hang on rods from the roof, waiting for their owners to pick them up. Like most such establishments, the place smells of petroleum-based solvents—chemicals that are highly effective at dissolving stains but also highly toxic, causing headaches, dizziness, drowsiness and allergic reactions to the skin and eyes.

James Nguyen, a Vietnamese immigrant who has run the business for five years, wanted to adopt a greener method of cleaning that uses water instead of hydrocarbons, making it not just healthier, but more cost-effective and energy-efficient. “Wet cleaning is where the future lies,” he says. 

The problem, as Nguyen and many other small business owners who want to go green—or make any kind of investment these days, even on a small scale— have discovered, is getting a loan. Banks have traditionally been reluctant to lend to dry cleaners, which in the Bay Area are owned mainly by Asian immigrants, because of the toxic nature of the industry. The recession has made the mainstream banking system even more cautious. 

So Nguyen approached San Jose¬–based Opportunity Fund, whose representatives he met at a trade show. The nonprofit specializes in microfinance—the provision of small loans and credit to low-wage consumers and small entrepreneurs who lack access to traditional banking and related services. 

Opportunity Fund recently lent him $52,000 to buy new equipment, including a specialized washer, dryer, and finishing machines. Much of the money comes from the Obama administration, which has given the nonprofit $37 million in economic stimulus funds to distribute, of which $7 million is earmarked for small business and community real estate. 

“With this loan, we will be the first in the Bay Area to have both hydrocarbon and wet-cleaning options for our customers,” Nguyen says. 

Going Green to Survive 

As the recession drags on, a growing number of small entrepreneurs—many of them immigrants and ethnic minorities—are realizing that going green may be the key to their economic survival. To afford this investment, increasingly they are turning to nonprofits like Opportunity Fund and Accion USA, a microfinance organization headquartered in New York that has lent $119 million in the U.S. since 1991. 

Micro-lending has met with great success in the developing world, where a tiny amounts of money may be enough to pay for livestock or tools to help families and communities achieve long-term stability. But the need for such services in the U.S. is enormous, too. Since the 1970s, microfinancers have lent some $300 million to tens of thousands of U.S. businesses and entrepreneurs—everything from day care centers, restaurants, home cleaning services and landscapers to hair salons, chiropractors, and truck and taxi drivers. 

The U.S. has more than 22 million self-employed micro-entrepreneurs—owners of small businesses with five or fewer employees that require $35,000 or less in capital. More than half of them lack access to financial services, according to Accion USA’s website. 

In the San Francisco Bay Area alone, some 50,000 entrepreneurs are in need of microfinance services, Opportunity Fund estimates. Overall, 30 percent of Americans have no banking relationship whatsoever, says the nonprofit, which has lent more than $12 million to Bay Area small businesses since 1995. 

Big Banks Don’t Like Small Loans

In the developing world, micro-loans generally total no more than a few hundred dollars; in the U.S., the upper limit is usually $35,000, though some loans (like the one to Nguyen) are larger and many are far smaller. Opportunity Fund for example, has made green loans to 48 entrepreneurs, totaling $644,150, for an average of around $13,000. Accion USA, whose five-month-old green-loan pilot program is available in New York and Massachusetts only, averages about $7,000 per borrower. 

Paradoxically, the modest amounts can work against entrepreneurs. “For a big bank to be profitable, a small business loan should be at least $50,000,” says Caitlin McShane, an Opportunity Fund spokesperson. “The market structure and cost makes it difficult for the small business to get loans from the big banks.” 

That’s especially true for small businesses owned by refugees or recent immigrants. Many run on cash basis and are not well integrated with mainstream financial institutions, and many owners do not have enough credit history to satisfy risk-averse banks, McShane adds. 

This was the problem for Corey Grissin, co-partner in Basic Green Cleaning, an eco-friendly janitorial company in San Francisco founded by his father in 2007 as a hands-on, practical way to join the green movement he had admired since the 1970s. The fledgling company (three employees) needed a small infusion of funds to improve cash flow and recruit customers, but its short corporate history worked against it. 

Eventually, Grissin was able to borrow $2,150 from Opportunity Fund. “When I went to regular banks,” he says, “they didn’t understand my situation and the idea of getting more money to help grow my business.”

For all the talk about eco-conscious trends, small businesses that want to go green often find, like Grissin, that mainstream banks don’t understand their needs or goals. Nguyen, for example, found the big institutions he approached had very little knowledge about wet cleaning. “There are very few financial companies offering loans for this kind of thing.” 

Immigrant entrepreneurs may find it especially difficult to communicate their vision for their business or advocate for their financial needs—both with banks and with potential customers.

A recent survey of 60 Bay Area businesses by SF Works, a nonprofit that aligns business, civic and community motives to create new workforce policies and practices, highlights the biggest challenges facing small entrepreneurs in the green sector. Some 64 percent of businesses with 6 to 20 employees cited access to working capital as their biggest obstacle to growth. 

Though only 25 percent of smaller businesses (one to five employees) cited access to capital as their main problem, they were more likely than other businesses to cite a need for marketing or education. “Even though they are optimistic about green opportunities, their first priority and concern is creating consumer demand for their green products,” says the group’s executive director, Carrie Portis.

Lower Interest Rates

Though green lending has long been part of the microfinance mission, it seems to have really taken off in the past year, McShane says. 

The typical interest rate for a microfinance client is 8 percent, she says. That’s about what a bigger business would be charged by a traditional financial institution, but small businesses might be charged much more. “Other alternatives for these businesses are credit cards or personal loans—both of which would likely have an interest rate higher than 8 percent,” she says.

While many small entrepreneurs are trying to expand into eco-friendly products or services, others are seeking loans to improve their energy efficiency by investing in new appliances like an Energy Star–rated refrigerator or laptop computer. 

Many experts note that an increasing number of small companies and self-employed people have to deal with regulatory changes aimed at curbing carbon emissions. For instance in San Francisco, Mayor Newsom’s Clean Taxi Program requires vehicles to meet certain green-house-gas standards by end of 2010. The taxi companies enforce this by requiring their drivers to replace their older cabs—usually former police cars, which cost around $7,000—with hybrids and CNG vehicles. A used hybrid typically costs around $15,000. 

“Taxi drivers have been traditionally under-banked,” says McShane. “Since they are often unaware of this alternative source of funding that can help them stay in business, they often make choices to close down or to get really expensive financing.” 

She says it important for government agencies to help small businesses find solutions to make these changes by connecting them with resources like Opportunity Fund. 

“Small businesses will see much more demand if the cost of their services can be lessened as the consumer cannot bear the whole cost,” Portis adds. “But for that they will need subsidy, rebates and support from public policy.” 

Yet, despite Obama Administration’s focus on green energy, and all the microfinance options available, small business owners aren’t clear about how to leverage green possibilities to help their businesses grow. 

Those that do take the leap know it’s a risk. “I am not sure how our customers will respond to this change,” Nguyen. “I think we will have to make them understand that this is a cleaner system that gives smoother results.” Even if sales do go down at first, he adds, “I am still optimistic about this new technology…. I have seen that once the customer accepts this change, profits will increase.”


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