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Susan Schreter Interviews Eric Zarnikow

Susan Schreter Interviews Eric Zarnikow, Assoc. Administrator, SBA Office of Capital Access

"Voices that Matter" Originally published at MSN: Business on Main.

Microloan organizations are an emerging funding source for startup entrepreneurs who have little to no credit history, assets or even business experience. Loan interest rates are often several points below bank credit cards and other traditional small-business financing products. Business on Main spoke with Eric Zarnikow, associate administrator of the Small Business Administration's Office of Capital Access, about new initiatives to boost the capacity of microloan organizations across the United States.

Susan Shreter: How was your office affected by the credit meltdown last fall?

Eric Zarnikow: There is an old Chinese phrase that is thought to be a curse that says, "May you live in interesting times." Well, it certainly has been an interesting time at the SBA and in Washington, D.C.

Your office was under pressure to perform quickly to help small businesses that suddenly lost credit availability.

When you think about the mission of the SBA, it's to expand capital for small business. We're not trying to replace the private sector, but to enhance what it does. In connection with the credit crisis last fall, we saw a very substantial falloff in SBA lending. Loan volume with our partner banks was probably down 40-plus percent on a year-over-year basis.

As part of the Recovery Act, the SBA got $730 million to support programs that provide capital to small businesses. From the time President Obama announced these programs on our behalf we were able to move quickly as an agency and roll out these programs in about a month. Since the Recovery Act was passed we're seeing that loan volume is up 60 percent to 70 percent, so the Recovery Act has really started to hit the spot.

Most Americans know about microloans only through the work of Nobel Prize winner Muhammad Yunus, who founded the Grameen Bank to provide small-business loans to ultra-poor people in the Third World. How does the SBA's microloan program operate in the U.S.?

There is a network of approximately 160 nonprofit organizations around the country that we call microloan intermediaries. The SBA loans money to these microloan intermediaries and, in turn, these intermediaries provide small loans to small-business borrowers or microbusiness borrowers. We also subsidize the interest rate to the intermediary to help provide a lower cost structure to these organizations and their borrowers.

How has the Recovery Act helped microfinance organizations?

Our normal annual budget for microfinance is about $20 million to $25 million in lending authority, and we got an incremental $50 million in the Recovery Act, so you can see that this is a huge program boost.

These organizations use our funding in two ways. The first is for loans. The second is for technical-assistance grants to develop local training and counseling programs to help their borrowers succeed.

We're also investing in outreach programs to get more communities involved in microfinance. We have added about 10 new intermediaries to the program in Vermont, Minnesota, Florida, Virginia, Ohio, for example. We want to have as broad a reach as possible.

How is microfinance training different than what is available at an SBA office?

We have a number of great educational resources at the SBA Web site and district offices. I think the technical assistance that is offered through our microloan intermediaries is a little bit more hands-on and attuned to the needs of local areas and borrowers.

How are the credit terms different for microfinance-originated loans than more traditional SBA-backed 7(a) loans?

There are a couple of areas of difference. First, the credit quality of the borrower may be lower than a traditional borrower. Microfinance organizations tend to deal with more startups and there is often very little collateral to support these loans. The average loan size is about $12,000 to $13,000, with a maximum loan amount of $35,000. The lowest loan amount may be as little as a few hundred dollars.

Are credit scores required for microloan applicants or borrowers?

We leave it up to the intermediaries to decide how they will underwrite their loans. It's their choice.

In the U.S., do you have to be "poor" to qualify for a microloan?

Not necessarily. Obviously, our focus in the microloan program tends to be on underserved markets.

What do you mean by "underserved"?

Markets or communities that are not well supported by conventional lenders, which can be in inner cities or rural areas. In many parts of the country there is a need for greater access to financial services for small businesses and people who are not able to meet normal bank standards even with the SBA guarantee.

Typically, when we think of microborrowers, there is an assumption that they are unbankable. But what we hear more and more is as unemployment has increased, there are more people who are interested in starting up businesses. Microfinance loans can help these people get started.

How does your office monitor the success of microloan programs? Is success defined by loan repayments, job generation or some other metric?

There are a number of metrics that we look at. Job creation is one of them. Each year microloans generate about 4,000 new jobs. We also look at default rates and how much capital is recycled by our intermediaries. As borrowers pay back loans quicker than expected, the intermediaries are able to make new loans to more new borrowers, driving greater community impact. We like that extra leverage.

What do you see as the future of microfinance in the U.S.?

With double our normal funding level, we've been able to take a fresh look at our programs and explore new opportunities. In the end, our goal is to help close small-business funding gaps and to help people who might have qualified for conventional business credit in the past, but don't today.


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