When Caitlin McShane looks down San Francisco's Mission Street, she doesn't see taco joints and bodegas bulging with ripe fruit. She sees sharks.
"Look over there -- payday loans,'' says the spokeswoman for San Jose-based Opportunity Fund, a Bay Area-based microlending nonprofit that helps small businesses get off the ground or expand. "And there's a check-cashing place on the corner. There's a pawnbroker, a loan office, and another payday loan place. People are getting into debt to loan sharks and even pawning their things to keep their businesses from going under. It's a mess, and this is what we're competing against.''
Sixteen years after making its first loan of $17,000 to San Jose's Treasure Chest Aquarium, Opportunity Fund has become the country's third-largest microlender and a star player in the burgeoning realm of microfinance, much of it clustered right here in the Bay Area. And while microloans are more often associated with helping goat farmers in Uganda than food trucks in Oakland, they've become an increasingly popular method of alternative financing for small businesses, many of them struggling beneath the crushing weight of the Great Recession.
"The growth rate of microfinance around the world is astounding, growing faster than worldwide Internet usage,'' says Sean Foote, a venture capitalist who teaches a course on the subject at UC Berkeley's Haas School of Business. "Here in the U.S., it's a relatively new trend, but with 25 million 'unranked' people without access to credit, there's a huge market out there and the role of microlenders will continue to expand.''
Manuel Godino, a 47-year-old chef from Buenos Aires who came to the United States after Argentina's currency crisis in 2001, is a beneficiary of the trend. After running his nascent empanada business out of rented kitchens, Godino got a $45,000 loan at 7.5 percent interest from Opportunity Fund, opened a small restaurant this summer on Valencia Street in San Francisco, and has already hired eight full- and part-time employees.
"I looked all over for someone to give me money, but I had no credit,'' he said, cranking out dozens of steaming empanadas for his lunchtime faithful. "I was able to show the lender that even though I had no credit, there was a big demand for my product. I could never have done this or hired these workers if I hadn't gotten that loan.''
He's got a lot of colorful company -- local microloans have helped a robot startup, a cupcake vendor, San Jose dry cleaners converting their operations to green businesses, and even a hair salon that becomes an art gallery by night.
Locally based groups with a hand in microlending include the Women's Initiative for Self Employment, which helps low-income women start small businesses with training and financing, and Urban Solutions, a San Francisco service working to facilitate loans for entrepreneurs who may have impaired credit or who lack collateral. Along with so-called peer-to-peer lending sites like Prosper, and other startups that connect individual lenders with borrowers online, microlenders are a compelling piece of a parallel banking system supporting the self-employed and others with little or no access to traditional banking services.
With funding from foundations, individual donors and banks themselves, microlenders have been able to help thousands of aspiring business owners who otherwise would be shut out from getting seed money or forced to take out high-interest loans. Rob Garcia, formerly head of peer-to-peer lending network Lending Club, says a main reason people have trouble going the traditional route is that banks see small loans as a hassle.
"Imagine a large bank having to spend all those resources managing thousands of these different small loans,'' he says. "These big banks are looking to give a million or two or three. So if you have a food truck or a small alteration shop working out of your garage, you have to try other options.''
Garcia says these alternative forms of financing often have a do-good element built in, so individual lenders can "do something right for people who need the money but are unranked or under-banked.'' That's industry lingo for an entire subculture of Americans with either no credit history, bad credit or a lack of financial literacy, a problem common among recent immigrants who easily fall prey to predatory lenders.
San Francisco-based nonprofit Kiva, perhaps the best-known microfinance outfit around, has mushroomed from a small lending project launched in a Ugandan village to become a powerhouse nonprofit, with 100 employees doing $100 million annually in loans to groups and individuals in 60 countries. In 2009, Kiva began domestic lending, partnering with Opportunity Fund in the Bay Area and other microlenders around the country.
CEO and co-founder Matt Flannery, 34, says that despite its growth, microlending in the United States faces different challenges than it does overseas. For starters, there are higher costs and more red tape getting a business up and running, he says. "These kinds of loans are really important,'' says Flannery, "and we need to make the system more efficient.''
Rich Schlarb was a trucker in trouble when opportunity knocked. After starting his one-rig RLR Transportation in San Jose in 2006, Schlarb soon found himself swimming in debt from credit cards and other high-interest loans, including a nearly 15 percent truck loan from a local dealer. After his wife lost her job, Schlarb realized "that if I didn't reorganize all this debt somehow, we were going to be in serious trouble.''
Securing a microloan for $45,000 took nearly half a year of vetting. But when he locked it in February, Schlarb was able to pay off the more onerous loans, then use his savings for deferred maintenance on the truck. "If it weren't for the microloan,'' he said, "I don't think our business could have kept going.''
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