Truly small business loans

LOS ANGELES – The Alameda Swap Meet in South Los Angeles is about the last place you’d expect to find a breakthrough in small-business lending.

Filled with Spanish-speaking mom-and-pop vendors selling cowboy boots, videos, quinceanera dresses and fresh fish, the indoor bazaar tends to be long on cash sales and short on formal bookkeeping.

But vendor David Manzo is building his business one swipe at a time. Every time a customer pays with a credit or debit card, a portion of that sale automatically goes to pay down a $5,775 loan to the Mexican immigrant, whose Mirna’s Market offers herbal remedies and religious items.

The loan’s 12 percent interest rate is a fraction of what Manzo paid in the past for expansion and inventory loans. And he never worries about repayment. If business slows down, his installments drop automatically; when things pick back up, the higher sales mean the loan balance goes down faster.

Keeping up with his payments “is just not a problem,” Manzo said, surrounded in his cramped stall by kidney pills, amulets and devotional candles. “I really don’t have to think about it.”

In a season of political clashes over Uncle Sam’s role in the private sector, Manzo’s loan – an innovative product dubbed EasyPay – was made possible by a little-known partnership involving the government, financial institutions and charities.

His lender is Opportunity Fund, a nonprofit that is among roughly 700 federally certified Community Development Financial Institutions. The CDFIs, as they are known, include some small banks and credit unions, but most are community loan funds along with a scattering of venture capital funds.

The institutions provide subsidized loans to low-income and hard-to-serve customers using funds from banks, foundations, religious groups and individuals, along with awards from the U.S. Treasury.

Such microlending has boomed in the developing world, involving “lending circles” of individuals who pool their savings.

Mainstream U.S. banks have found tiny loans expensive to administer and fear being criticized for charging rates high enough to cover their costs. So they have largely yielded the field to nontraditional private-sector lenders, including the CDFIs.

“Microlending can be the answer to job creation and upward mobility in the U.S. The problem is that financing a hair salon is a different ball of wax from financing a goat” in a developing country, said Mitch Jacobs, founder of On Deck Capital Inc., a for-profit microlender that makes short-term loans at 18 percent to 36 percent.

Because CDFIs are closer to their customers and often less constrained by regulations than banks are, they’re often better positioned to stretch out repayment periods and to provide lower rates.

“It’s relationship banking on a very small scale,” said Bill Luecht, a spokesman for Treasury’s CDFI Fund, noting that the hand-holding often includes helping customers develop business strategies and improve their creditworthiness. “They may work with a business for a year or more before they even make a loan.”