SBA to Resume Micro-Lending Program in L.A.

Following a two-year hiatus, the Small Business Administration is set to resume its micro-lending program in Los Angeles, a move that could eventually funnel up to $2.5 million worth of tiny loans to hundreds of credit-starved entrepreneurs countywide.

The program will be administered through the nonprofit Valley Economic Development Center in partnership with FAME Renaissance, a church-affiliated nonprofit that has been providing loans and technical assistance to small businesses in South-Central Los Angeles since the early 1990s.

Up to $750,000 in micro-loans will be made available in the first phase of the program, which should be up and running by summer.

The Los Angeles effort comes amid renewed interest in micro-credit nationwide as a means to help worthy entrepreneurs struggling to find financing even in a booming economy.

“We’ve got 30 or 40 people ready to apply for this loan right away,” said John Rooney, president of Van Nuys-based VEDC. “The demand is just tremendous.”

Launched in 1991, the SBA’s micro-loan effort targets small businesses with loans of up to $25,000. The average loan size is about $10,000--a small fortune for a cash-strapped entrepreneur, but hardly worth the paperwork for traditional lenders. Since its inception, the program has provided more than $65 million to small businesses for needs like working capital, inventory and equipment.

In contrast to its familiar role as a loan guarantor, the SBA extends credit to nonprofit organizations that then turn around and make micro-loans to entrepreneurs in their region. These intermediary lenders screen the borrowers, service the loans and are on the hook to repay the SBA whether the loans perform or not.

“This is a business, not a welfare program,” said Mark Whitlock, executive director of FAME, a subsidiary of the First African Methodist Episcopal Church of Los Angeles. “We expect to get the money back.”

The SBA’s first micro-lending effort in Los Angeles suffered a setback in 1996, when its original partner--the Coalition for Women’s Economic Development--closed its doors. Outstanding loans were unaffected, but the local office of the SBA had to cut through some red tape to reestablish the program.

VEDC, an experienced micro-lender that also operates publicly funded small-business development centers and entrepreneurial training classes, emerged as a natural choice, according to Alberto Alvarado, director of the Los Angeles district office of the SBA.

“They’ve got a solid track record and the technical assistance component,” Alvarado said. “That’s essential in this kind of lending.”

VEDC, which concentrates its efforts in the Valley and the northern reaches of Los Angeles County, teamed up with FAME to expand its reach.

“We wanted a partner that knew South-Central better than we did,” said Roberto Barragan, vice president of business lending for VEDC. “We have an obligation to serve the entire community.”

The program initially will serve only Los Angeles County, but could eventually expand to parts of Ventura County, Barragan said. Under terms of the deal with the SBA, VEDC and FAME together can lend as much as $750,000 the first year, then apply for additional funding up to a maximum of $2.5 million.

Although the new micro-lending program will be open to start-ups, the typical loan candidate will have been in business at least a year, Barragan said. Like any bank, the loan committee will evaluate applicants for the four Cs: credit history, collateral, cash flow and character. But unlike traditional lenders, it will be willing to consider promising entrepreneurs who may have a few nicks on their record or who don’t fit the conventional mold.

Some 328 micro-credit programs now exist in the U.S., with California leading the pack with 39, according to the Washington, D.C.-based Aspen Institute.

In addition to nonprofits, agencies such as the Los Angeles Community Development Bank now provide micro-loans in the area. Major commercial banks such as Bank of America also are participating in loan pools earmarked for that purpose.

Still, local micro-lenders say it’s not enough to meet the demand for credit, particularly in the vast Los Angeles area.

Michael Ocasio, executive director of the Inland Empire Lender’s Community Development Corp., a Riverside-based micro-lending agency, says he’s finding it difficult to interest banks and other investors in funding an additional loan pool. The group currently has $400,000 in loans outstanding in a service area that stretches to Arizona.

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