John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
Give the proverbial man a fish and you feed him for a day; teach him to fish and you feed him for a lifetime. Lend a woman money to sell worms for bait and you nourish a village.
Our capitalist economy runs on entrepreneurs with ideas and initiative. Running a successful business takes more than that. It requires access to capital.
A thriving business typically has little trouble raising capital. Small companies just starting out struggle to finance expansion plans. They may not have a credit history, good credit scores, or financial literacy. Small businesses often require loans so small that even community banks do not take an interest. The business owner may face bias based on gender, race, ethnicity, or immigration status. Even if they can get a loan, high interest rates significantly reduce the potential for making a profit.
In an attempt to level the playing field, the Lowell Small Business Assistance Center (SBAC) has launched a Microloan program. According to SBAC Director Stacie Hargis, “The mission of the fund is to help create, strengthen, and expand businesses owned by low and moderate-income individuals in the region.”
When they say micro, they mean micro. The SBAC will offer loans for as little as $500. Businesses in 17 communities in the Merrimack Valley are eligible for the program.
Microcredit emerged as an economic development tool in poverty-stricken countries like Bangladesh. In 2006, Muhammad Yunus and the Grameen Bank he created (Grameen means village) won the Nobel Peace Prize for their effort to fight poverty via microcredit.
The SBAC is currently working with a bakery, and an immigrant trying to get started in sustainable farming. They also expect to lend to other retail stores in the Merrimack Valley. Grameen clients in Bangladesh are escaping poverty by making bamboo stools or tending cows for milk. The conditions may be very different in the two economies, but the goals of micro lending are very much the same.
When I asked SBAC Director Hargis how she would measure success of the Microloan program, she immediately cited jobs. In June, there were 25,659 people officially unemployed in the Merrimack Valley. Thousands more are out of work but not counted as unemployed or work part time due to a lack of full-time jobs. Many have been out of work for over a year.
Workforce development is essential. What better way to develop the Merrimack Valley workforce than by creating local jobs with local businesses.
United States Census data shows that many more people work for large companies (500 or more employees) than small businesses (less than 20 workers). In a typical year large companies create a lot more jobs. They also destroy a lot more.
In 2007, the most recent year for which data is available, medium and large companies showed a net loss of 450,000 jobs. In the same year, small businesses created a net gain of almost a million jobs. A study by the Federal Reserve covering the years 1990 to 2003 (which included two recessions) found that 80 percent of net job creation occurred in small businesses.
An increase in household income is an explicit goal of the SBAC. Most economic development programs, if successful, improve average incomes. Dr. Yunus’ goal is to end world poverty by enabling the poor to earn a sustainable income.
Similarly, the SBAC approach focuses on low and moderate-income individuals. This distinction is important in a country, in a Commonwealth, where inequality is reaching disturbing extremes.
Promoting equality requires that economic development be sustainable. Toward that end, the SBAC program will both require and provide technical assistance. Examples of technical assistance include financial literacy, business planning, and computer training.
If successful, small businesses will mature to the point where they become self-sufficient and gain access to conventional credit markets. They may become mentors for the next generation of Microloan program applicants.
A program like this cannot guarantee every client will become a successful business. Some will fail. Without access to credit, small businesses are at a competitive disadvantage. Most will fail. By combining small loans with technical assistance, the SBAC can give entrepreneurs an opportunity to succeed or fail on their own merit.
Client success will be the key to the sustainability of the Microloan program. Over 98 percent of Grameen Bank borrowers repay their loans — much better than “conventional” business bank loans.
A combination of private banks and a federal grant provided the funds to seed the Microloan program. The SBAC will strive to achieve high repayment rates by emphasizing technical assistance, standardized lending practices, and personal relationships. If they do well, the next round of funding will come from the first generation of small businesses paying off their loans.
Every entrepreneur that succeeds is a potential new customer for the banks. Every business that generates income and jobs generates tax revenue for the government.
Some argue that microcredit will not work in the developed world because of the cost of administering loans. Indeed, the Lowell SBAC may require continued outside funding to process applications and provide small business training. If so, the return on investment should be much better than for the large tax credits offered to big businesses that already enjoy big advantages.
Just consider how many entrepreneurs in the Merrimack Valley Stacie Hargis could help with the money we gave Mark Wahlberg for filming The Fighter in Lowell. The SBAC may end up nurturing the next bait and tackle shop, the next boxing gym, or the next web site to compete against the Lowell Sun. Someone starts out by thinking small, and soon you have a greater Lowell.