A little money | As banks rein in lending, microloans are alive and well in Oxford County

After Kathy and Dan Deluca took a class on writing business plans to prepare for skeptical loan officers, they were able to plunk down on the desks a sizable and well-researched business plan. But the thump of their proposal just echoed in quiet offices. Not one of the four banks they visited opted to give the couple a loan to open a tavern in the Norway-Paris area.

“We went to every bank and sold our pitch but no one wanted us because bars and restaurants are the biggest risks,” Kathy says.

Along the path of rejection, however, the Delucas, who live in Paris, heard about an alternative lender at — of all places — a social services agency. As a last-ditch effort, the couple visited Community Concepts’ offices in Paris. “We were running out of options on where to look for funding,” Kathy says.

Within one or two weeks, Community Concepts’ small-business loan committee had approved them for an initial loan of $13,000.

The loan — or “microloan,” as such small outlays are called — helped. On Aug. 9, 2004, with a second microloan from another nearby nonprofit, the Delucas were able to open the Smilin’ Moose Tavern in Paris’ busy Market Square.

On a recent afternoon, Kathy fiddles with a calculator to tally the annual gross sales: $300,000, she says, which supports two full-time employees and 10 part-timers. The restaurant is not yet profitable, but “we’re more successful than we thought we would be at this point,” says Kathy, smiling under the many dangling stuffed moose animals that decorate the tavern.

Kathy Deluca credits their success to Community Concepts, a 43-year-old agency that has traditionally helped low-income people in Oxford, Androscoggin and Franklin counties with family, housing and transportation services. After a proven track record with these services, the organization is now on a mission to reinvigorate and grow its microloan department, hoping to spur the local economy with more stories like the Delucas’.

Community Concepts and other nonprofit lending organizations that make small, risky loans in Maine and in the United States, often to those overlooked by traditional banks, provide a critical function in regions lacking the big businesses that form the backbone of a prosperous economy. Their aim is to hoist emerging entrepreneurs out of low-paying jobs and into self-employed security, and ideally into a place where they one day can employ others. In Oxford County almost one out of three people works for a micro-business, 81% of them one-person operations. (Micro-businesses are generally defined as a company with five or fewer workers.)

Yet Community Concepts’ lending specialist Ron Knott says the Oxford County region lacks adequate microloan financing to meet a growing demand from wannabe entrepreneurs. What’s more, the organization has plenty of work to do to spread the word that its microloan program is healthy and has money to lend. “We see a tremendous void and a niche we want to fill,” says Knott.

A sea of opportunity

Although Community Concepts was armed with an economic development mandate as far back as 1984, it had over time let its microloan program fade, issuing only the occasional loan. Part of this decline was due to customers migrating to the Growth Council of Oxford Hills, a local economic development agency created in 1994 by community leaders who wanted to counteract the region’s economic slump. “We almost shut the [microlending] program down,” says Dennis Lajoie, director of real estate at Community Concepts.

But the Growth Council, after several controversies around a string of bad investments, broke apart last year, and its absence has left a hole in Oxford County’s commercial funding landscape, according to Knott. These days he receives five or six calls a week from those seeking small-business loans, versus the lone caller who used to ring every few weeks. Anecdotally, too, microlenders in Maine and across the nation are reporting that more people have been approaching them since the housing market and economy started getting squeezed.

Community Concepts is not the only nonprofit in the area issuing microloans. The Auburn-based Androscoggin Valley Council of Governments, or AVCOG, and the Lewiston-Auburn Economic Growth Council — as well as agencies farther afield — are active issuers of microloans in western Maine. And while the federal and state microlending pools that largely fund these agencies’ loans are not overly competitive, they are limited. Plus, the demand for microloans is constrained by how much an agency can afford to spend on marketing its microlending program to draw a wide pool of customers. And if a program does not back quality businesses that survive, it will not become sustainable, meaning it will remains dependent on often unreliable funding from public and private sources. (For example, the U.S. Small Business Administration — a prime source for microloan financing — has become accustomed to fighting heavy annual budget cuts for its microloan program in recent years.)

Nonetheless, Community Concepts is gearing up for big growth in the next few months, and hopes to increase the number of microloans it makes a year from about five or six to 30. “We saw the opportunity to grow the program, to access additional monies, to become more visible to businesses,” Knott says. “We’re making a marketing push to get our name out there more.”

To that end, Community Concepts is hunting for a new employee who can scout for potential and existing small-time entrepreneurs, literally walking up and down Main Streets, asking about business owners’ ambitions. “We hope this person will make the general public aware,” Knott says.

Awareness is a big deal for Community Concepts, which has to fight the notion that a social services agency can’t be in the business funding game. Knott says he’s run across plenty of people who readily associate Community Concepts with vans for the elderly and disabled or with Head Start programs, but not with business loans. Referrals from banks help, but the organization faces a challenge getting the word out to a market that is “diffuse and difficult to reach,” according to Ellen Golden, senior vice president of Coastal Enterprises Inc., a community development organization in Wiscasset.

Meanwhile, opportunities for microlending are vast, Golden says. “The majority of Maine businesses are on a micro-business scale,” says Golden. In Maine, there were 138,337 micro-businesses in 2005. Nearly eight out of every 10 microbusinesses are solo operations.

From an economic perspective, the microloans from organizations like Community Concept directly impact a significant slice of the state’s economy. For the past few years, James McConnon, an economics professor at University of Maine in Orono, has analyzed micro-enterprises in Maine to quantify their economic impact. In 2005, his most recent data available, McConnon found that 21.8% of the state’s population was employed by a micro-enterprise. The United States’ average was 18.3%. In Oxford County, the percentage was 27.5%, with a total of 5,534 micro-businesses.

McConnan also found that microbusinesses in 2000 contributed $4.7 billion to Maine’s economy, accounting for 13.2% of the gross state product. “One gets a pretty good idea of just how important collectively these microbusinesses are,” he says.

Spreading the word

Maine has an unusually high number of microlenders proportionate to its population because it is a rural state that’s seen a decline in its natural resource-based industries and a large population of small businesses. In short, the need for such loans is greater in Maine than in other states like New Hampshire and Massachusetts.

The SBA is a big source of microloan funds, with a federal appropriation of more than $10 million a year. Since 1992, the SBA has been lending money at low interest rates — from 1.25% to 2% below the five-year U.S. Treasury rate — to nonprofit intermediaries across the country that, in turn, make microloans to businesses in their communities. Last fiscal year, the SBA loaned $17.7 million to nonprofit agencies that made a total of 2,489 microloans. Maine agencies loaned $719,500 in 36 SBA microloans.

(In Maine, the SBA’s intermediaries are Coastal Enterprises Inc. in Wiscasset, AVCOG, Northern Maine Development Commission in Caribou, Eastern Maine Development Corp. in Bangor and Community Concepts. But many other agencies, including banks, can offer microloans. Other sources of microloan funding can come from organizations like the Finance Authority of Maine, the U.S. Treasury’s Community Development Financial Institutions Fund or private foundations.)

Greg Whitney, the finance director of AVCOG, a nonprofit regional agency serving municipalities and businesses, says he sees his organization already adequately handling the microloan need in the western Maine region. “We have sufficient funds to meet the demand we’re receiving,” he says. “I don’t know of any businesses that have said we can’t get a microloan because of a lack of resources.”

Knott says Community Concepts does not want to step on the toes of other microlending agencies. To avoid this, the agency is narrowing its focus to Oxford County, an unusually small market. Yet Oxford County, with a population of only 57,118, might be as good a place as any to heed the microlending call. The unemployment rate hovers around 7% — the region has not recovered from the steady exodus of its manufacturing mills and tanneries over the past few decades. But where these industrial giants are now idle, microbusinesses abound. “People do see opportunities within their community, and it is a way to survive in rural communities,” Knott says. “Not everyone can go work in Wal-Mart, and to create your own business is a dream come true for some people.”

Moreover, rather than compete with other agencies, Knott says Community Concepts will cooperate with them. “We partner with them at any chance,” he says, for instance by splitting a loan with another agency or with a bank that wants to invest, but not fully, in a budding business.

To better serve its corner of the state, Community Concepts is working to grow its $500,000 lending pool. It recently received a $60,000 award from FAME’s Regional Economic Development Revolving Loan fund that it will use in part for microloans. Knott also is preparing to borrow more money from the SBA (it has about $150,000 now). A nonprofit intermediary can request up to $750,000 from the administration in its first year of participation, and not exceed a debt of $3.5 million in later years.

As it prepares to augment its microlending activities, Community Concepts is bracing for a surge in demand caused from the economic downturn. AVCOG’s Whitney says microloan activity has grown significantly in the past year. “A lot of people may have been laid off from their job, or the banks are conservative right now in lending,” he says. “This past winter, because of energy prices, companies had a hard time with cash flow, so we would help them through the winter. Given the economy and fuel prices, small businesses will continue to struggle.”

Knott is confident that with the right marketing, which entails setting getting the word out at trade shows and through Community Concepts literature, the agency’s microlending push will meet success. “If we staff it, we can be a substantial player in the microloan arena,” he says. “Especially here where there is no development or industries, or they have gone away.”

Rebecca Goldfine, Mainebiz staff writer, can be reached at rgoldfine@mainebiz.biz.

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