Micro-loans: Going the Extra Mile

Recently Governor Parnell proposed legislation to start a Microloan Revolving Fund citing that Alaska is one of a few states where mom-and-pop firms can’t tap a similar federal program.....and he is right. The Small Business Administration has had it’s own 18-year-old micro loan program but in a recent conversation with Nelida Irvine, a Lender Resource Specialist for SBA Alaska, she noted that there has been some interest in the micro loan program but they have yet to see anyone offer the program. In a comparison to other similar states Alaska falls well behind in micro lending.

Micro loans can provide a successful way to promote economic development. They are typically offered by Community Development Financial Institutions and are small loans targeted at start-ups that do not qualify for loans from commercial lending institutions.

There are several successful examples of micro lending helping start-ups and businesses to expand. One example is the Rural Micro Loan Program of the Panhandle Regional Economic Development Council. In an interview with the Chuck Rivas of the Panhandle Regional Economic Development Council, he explained the rural fund is targeted at the 26 rural counties in the Texas panhandle. The loans range from $ 2,000 to $40,000 with a low interest rate of prime plus or minus 2 (the WSJ rate is currently 3.25%). The loan program was funded through a Rural Development Enterprise Grant. He notes the challenge of the program is it can be difficult to make high-risk loans work without the appropriate amount of collateral and to make some projects cash flow. Though there are plenty of success stories. One is a company was able to get a micro loan to buy airlifts to expand their transmission repair to include fixing flat tires. They were able to successfully increase their business and are repaying the loan.

Another example is the Mercy Corp NW Small Business Loan program. In an interview with Scott Onder, Fund Development and Strategy Coordinator for Mercy Corp NW, the program has successfully launched several small businesses from food carts to a local brewery and bike commuter shop. The Loan program is focused on five communities of practice. These include Wood & Forestry, Health & Wellness, Food & Farming, Daycare & Schools, Travel & Tourism; loans that promote sustainability. There has been some talk of providing loans for energy efficiency improvements to homes but there is no precedent yet. The biggest challenge for the program is servicing the loans. He cites that an important element of a successful micro loan program is to have strict parameters or criteria for those applying to the program.

The need for micro loans in Alaska cannot be understated. The Parnell legislation did pass but according to a loan officer at Alaska Division of Investments it has yet to be funded. Another program on the horizon, in a conversation with Dean Stewart the Director of USDA Business Programs, is the USDA is also slowly rolling out a new micro loan program. It will be interesting to see if these new programs provide that needed gap financing.