JUNE 2008: SMALL BUSINESS FEATURE
MICRO SQUEEZE
Funding for the smallest of businesses is harder to get.
By Abraham Hyatt
Nena Rawdah calls it “the first smack” — that
moment this last December when she saw the economy was slowing
and that it was going to hurt. It was the holidays and the
streets of Portland’s St. Johns neighborhood where
Rawdah’s bookstore sits were empty. The expected 20% jump
in sales from last year wasn’t going to happen and the
owners were going to have to make some hard decisions.
Three years ago, the future was bright. Rawdah and her
then-business partner were facing the typical tiny business
dilemma: great idea, minuscule personal equity and no way to
raise startup capital. And while the availability of
microlending in Oregon was dropping, the two partners were
still able to get a microloan from Mercy Corps Northwest, Mercy
Corps International’s local economic development
office.
Microloans are short-term loans that range from a few hundred
dollars to as high as $35,000. They’re made by nonprofit
economic development agencies that get funding from federal
agencies such as the Small Business Association (SBA), or from
low-interest loans from banks and foundations. There are at
least 60 agencies in Oregon that provide funding for the
state’s estimated 275,000 microenterprises — those
businesses with fewer than five employees and limited startup
capital — and Mercy Corps Northwest is one of the
largest.
The number of agencies making actual microloans has decreased
in recent years. Part of the drop is because of a loss of state
and SBA funding, says Lisa Dawson, executive director of
Northeast Oregon Economic Development District. Part of it
stems from rising administrative costs — increased
insurance premiums is one culprit — that force agencies
to cut the number of programs they offer, says Diane Searle, a
program manager with Cascades West Council of Governments.
And now comes the economic slowdown. Here’s what is
likely to happen: Microenterprises will go back to microlenders
for help. Newly laid-off Oregonians will look for microloans to
start businesses. Banks will be even more reluctant to lend
money to startups. And microlenders will be even more squeezed,
says Valerie Plummer, executive director of the Oregon
Microenterprise Network.
Plummer knows this because it’s what happened in the
last recession in 2001, when Oregon’s tiniest businesses
saw the bridgeable gap between dreams and profitability widen
into a deep chasm. Then, as now, it’s impossible to
quantify the number of people who won’t be able to get
microfunding, or tally the amount of funding that will dry up
due to the downturn.
What is known is that one avenue of help for Oregon’s
microenterprises — which employ as much as 20% of
Oregon’s workforce — is going to be harder to
get.
In 2005, Rawdah and her business partner opened St. Johns
Booksellers — tucked between two brightly painted Mexican
food joints on North Lombard — on a shoestring budget.
Half new books, half used books and lots of kids books —
the store did so well it was featured in an international
bookseller organization’s 2007 calendar.
Then came Rawdah’s “smack” and an unexpected
9% drop in holiday sales. “We were expecting some small
growth this year. But we see [customers] are taking this
seriously,” she says. “Now we’re expecting no
growth.”
Planned improvements to the store are on hold. The ratio of
inventory between new and used books is being re-evaluated to
hopefully better match customer demand. And with those
decreased expectations for growth, the partner needed out.
Rawdah had one choice: She applied for another microloan from
Mercy Corps Northwest to buy out her partner, and got it. She
says her approach to the next year is “very
cautious.”
Because of the mix of agencies and funding sources that are
involved, no one tallies the exact number of microloans that
are given in the state in a specific year. But numbers from
individual agencies are illuminative. Mercy Corps Northwest,
for instance, gave 23 microloans in 2007 for a total of
$260,000. Since 2001 the agency has made 140 microloans
totaling $1.3 million.
Oregon also provides funding for microloan programs. According
to Plummer, 2,850 microenterprise owners received $1.5 million
from the state during the 2005-2007 biennium, which either
created or retained about 1,158 jobs.
Microlending has been on the rise in Oregon over the past
decade. In 1998, Oregon Microenterprise Network was started as
a sort of umbrella agency by nine Oregon microenterprise
support agencies. Today, there are 60 member agencies, each
offering clients different types of funding and support.
Microloans are only part of the picture. Lending programs go
hand-in-hand with other programs that teach people how to write
or improve a business plan, the basics of bookkeeping or just
the fundamental nuts-and-bolts of entrepreneurism.
This is where microfinance blurs the line between
“banking” and social and economic development. A
2004 national study by the Corporation for Enterprise
Development found that 30% of the people who take advantage of
microenterprise programs are at or below the poverty line; 60%
are in the low- or moderate-income bracket. Multiple national
studies show double-digit decreases in poverty rates and
reliance on government assistance among those who start their
own microenterprises.
Plummer is an understandable cheerleader.
“Microenterprises are really the biggest job creators in
[rural] areas. They’re doing the most exciting
work,” she says. “In Elgin and Lakeview,
there’s no new Intel. They’re really looking to
entrepreneurs.”
And entrepreneurs are looking for money. Microloans have
funded an Enterprise busines that imports and packages tea, a
sign company in Elgin, and an outdor supplies store in La
Grande. That’s only one side of microenterprise; Oregon
is not all rural. Microloans were also behind a commercial
printer in Albany, a women’s clothing store on Belmont
Avenue in Portland and a flower shop in the Pearl District.
And, of course, a bookstore in St. Johns. But no matter where a
microbusiness might be, it’s going to be at risk in the
next year, says Anthony Gromko, a loan officer with Mercy Corps
Northwest.
“It’s going to be a huge challenge for our
clients,” he says. “Unemployment rates will be
rising and people will be budgeting tighter and tighter.
It’s going to be harder to start businesses.”
In March, the head of the SBA held a closed-door meeting with
the nation’s top bank executives to talk about
small-business credit and how banks had been tightening their
credit standards. Nothing was decided in the meeting, but
it’s an issue that isn’t going away. If standards
tighten further, it could push more small businesses into the
microloan pool. Shawn Winkler-Rios, executive director of Lane
Microbusiness in Lane County, says his agency has been courting
banks and other financial institutions to create a microloan
pool. The outlook for raising money is good, he says.
But that’s only one corner of the state. Like many
others in the microlending community, Dawson sees a possible
increase in demand for startup information and funding across
the state. Competing with those people will be existing
microenterprises looking for more funding. And so it’s
inevitable that some will be left wanting: Business plans will
remain as plans; teetering microenterprises that might have
been rescued by additional funding in a different year will
fail.
Rawdah knows she is on her own. She has 13 years of experience
as a bookseller and Mercy Corps Northwest taught her the nuts
and bolts of running a business. She already has a few years of
successful experience to lean on. And like many business
owners, large or small, she is positive, if pragmatic, about
the future.
“People are still buying houses here,” she says,
hopefully. “This is still an up-and-coming
neighborhood.”
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