Microloans in the U.S.A.

Markets and credit can make nice things happen, from the Washington Post, with this story of a pet care business seeking a loan and turning to:

the Latino Economic Development Corp.'s nascent microlending program, part of a growing network of financial institutions that specialize in small loans to mom-and-pop operations that are often below banks' radar. The average size of the LEDC's loans is $10,000 at a 10 percent interest rate, said Lending Director Rob Vickers. Many banks will not consider loans less than $200,000, he said.

Microlending first became popular as a form of foreign investment in poor, emerging markets. Before joining the LEDC a few years ago, Vickers was a microlending specialist in Latin America for the World Bank, including financing projects in Nicaragua to help rural villagers connect to electrical grids. The trend has been slower to take off in the United States, especially because many consumers have access to credit cards and because lending requirements were lax…..

the staff members at the LEDC were surprised that [pet care entrepreneur Ryan Fochler] could not qualify for a bank loan when he approached them two years ago. He reported record sales each year, with growth rates averaging 170 percent. The pet day care is profitable. Fochler employs 25 people and recently added dog training to his services. But he said that after the financial crisis, banks not only wanted to see profitability, but also matching assets.

At the LEDC, Vickers said staff members consider not only standard criteria such as credit scores in approving loans but also the entrepreneur's ability to pay. The LEDC requires all applications to go through credit counseling to be approved and scrutinizes companies' balance sheets. And it helps borrowers separate personal expenses from business ones, typically a tangled web for small-business owners….

Still, the tough economy has taken a toll on LEDC loan holders. The repayment rate fell from 100 percent in fiscal 2007 to 92 percent in 2009, Vickers said. Nationally, 69 percent of microlenders reported an increase in the number of workouts with customers, according to the Opportunity Finance survey.

Yes, the free play of loans at mutually agreed terms can make the world a better place. To see that same theme played out in a more controversial arena, see Katherine Mangu-Ward's Reason magazine feature from October 2009 defending payday loans.