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The Government Starts Microlending

Marc Tracy bizbox.slate.com

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April 3, 2009

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Microlending is hot right now--Muhammad Yunus won the Nobel Peace Prize a few years back for pioneering programs that lend tiny amounts of capital to poor entrepreneurs in poor countries, which ended up being paid back at far higher rates than big loans to rich people in rich countries. The Small Business Administration's new emergency microloan problem, for which the new stimulus law appropriated over a quarter of a billion dollars, is obviously quite a different beast. But the very basic principle--that canny entrepreneurs can make a lot out of just a little bit of extra cash--is a shared one.

Fortune takes a closer look at what's formally known as the Business Stablization Program. Very briefly and basically: small-business owners who already have bank loans may apply for microloans for up to $35,000 from banks, which will then be 100% guaranteed by the SBA (meaning that there is a certain sense in which it is the SBA, not the banks, making the loans, although there will be no direct SBA lending under the program). Additionally, the loans are, for all intents and purposes, interest-free--they last up to six months, are not due back before a year has passed (they must be fully repaid within five years), and--oh yeah--the SBA will fully subsidize whatever interest is charged. For this, the stimulus law appropriated $255 million.

So it's...basically free money to borrow. The condition to focus on is the requirement that borrowers already have outstanding bank loans. The purpose of the microlending program is less to give ambitious entrepreneurs a bit of extra cash to grow, but rather to give struggling entrepreneurs the chance to pay off interest on and hopefully pay off existing loans. Which is still great--for small business owners struggling with balance sheet troubles and potential insolvency; for banks, whose default rate should be improved by this (remember: even should any of these loans default, they're completely guaranteed); and for the SBA's 7(a) program, which is in dire straits indeed.

It's not quite the direct lending we've been clamoring for, but it is certainly better than nothing; and it could in turn work to buttress the 7(a) program and get credit--credit intended not to pay down debt, but credit intended, like Muhammad Yunus's, for growth--to start flowing to the country's entrepreneurs again.

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