Small Loans, Big Growth

As a teenager, Cory Jensen worked in the small business his father started on their farm in the southern Minnesota town of Lucan, making fiberglass markers and flags for farm fields, fire hydrants, trailers, and snow plows. When his father was diagnosed with terminal cancer, he sought capital funding to help ensure Cory could run the business into the future. But as a relatively inexperienced 25-year-old, it proved difficult for Cory to get conventional loans through area banks. So the Jensens were referred to the Southwest Initiative Foundation in Hutchinson, which makes microloans to entrepreneurs in 18 counties of southwest Minnesota.

Cory’s father passed away in 2006, but with $45,000 in two loans from the foundation, he was able to fulfill his dad’s dream. His small business, Country Enterprises, Inc., has grown from $200,000 in sales to $2 million.

Smaller Is Better

For a growing number of aspiring entrepreneurs in rural Minnesota, as well as new emigrants in Minneapolis and St. Paul, such microloans have become a critical financing lifeline. Popularized by the work of Bangladeshi economist and banker Muhammad Yunus, who received the Nobel Peace Prize in 2006 for providing financing to entrepreneurs in developing countries who are too poor to qualify for traditional bank loans, microloans have gained new credibility in mainstream markets and their use is growing throughout Minnesota.

Nontraditional borrowers often don’t have the collateral, credit history, or experience to get loans through conventional means. But because of Yunus’s work and the success of microcredit in other parts of the world, more in the banking industry now view these borrowers as pre-bankable instead of unbankable. In other words, they see their experience with microloans as a first step into traditional markets.

Funding Needs Grow

With Wall Street’s recent woes leading to tightened credit in traditional lending markets, some believe a trickle down effect will be higher demand for microloans in coming years. “Plenty of people have started their small businesses with home equity loans and didn’t feel a need to come to our foundation,” says Berny Berger, microenterprise program officer for the Southwest Initiative Foundation. “But some of those traditional sources of credit are drying up, so we expect to see more applicants in the future.”

The Southwest Foundation receives most of its microenterprise capital from the Small Business Administration and the U.S. Department of Agriculture, and then loans those funds at about 9 percent interest to its customers, typically for loan terms of six years or less. The average microloan is $10,500, Berger says, with the least amount loaned being $500 and the most being $35,000. Loans may be used for start-up costs, equipment, inventory, furniture and fixtures, or working capital—but not for real estate purchases or debt refinancing.