Microlenders fuel the big dreams of small entrepreneurs
Andrea Leinfelder
Oct. 9, 2014 Updated: Oct. 11, 2014 4:47 p.m.
1of11Mario B. Morales got a $5,000 loan from a microlender to help buy a better generator for his Yummy Dog food truck. Dave Rossman/FreelanceShow MoreShow Less
2of11Mario Morales prepares a Texan dog at his Yummy Dog food truck on Durham Thursday Oct 09, 2014.(Dave Rossman photo)Dave Rossman/FreelanceShow MoreShow Less
3of11Mario Morales serves Erick Navarro a Texan Dog at his Yummy Dog food truck on Durham Thursday Oct 09, 2014.(Dave Rossman photo)Dave Rossman/FreelanceShow MoreShow Less
4of11Morales says he has a passion for smoked meats, reflected in the gourmet sausages at Yummy Dog.Dave Rossman/FreelanceShow MoreShow Less
5of11Lisa Mendez, sales consultant, is shown working at Premier Wireless, 12220 Murphy Road, Thursday, Oct. 9, 2014, in Stafford. Premier Wireless is a Sprint authorized retailer, business dealer and service center. ( Melissa Phillip / Houston Chronicle )Melissa Phillip/StaffShow MoreShow Less
6of11Susie Arriaga is a store manager for Premier Wireless. The Stafford business got a $50,000 loan from Accion Texas that was used to hire two new employees, increase inventory and expand the store's accessory line.Melissa Phillip/StaffShow MoreShow Less
8of11Andrew Medina, left, service manager, and Eden Davila, technical consultant, are shown working at Premier Wireless, 12220 Murphy Road, Thursday, Oct. 9, 2014, in Stafford. Premier Wireless is a Sprint authorized retailer, business dealer and service center. ( Melissa Phillip / Houston Chronicle )Melissa Phillip/StaffShow MoreShow Less
9of11Mario Morales tries to bring in traffic to his Yummy Dog food truck on Durham Thursday Oct 09, 2014.(Dave Rossman photo)Dave Rossman/FreelanceShow MoreShow Less
10of11Mario Morales serves Zack Elbay at his Yummy Dog food truck on Durham Thursday Oct 09, 2014.(Dave Rossman photo)Dave Rossman/FreelanceShow MoreShow Less
11of11Mario Morales with a Tropical Dog at his Yummy Dog food truck on Durham Thursday Oct 09, 2014.The Tropical is a smoked chicken & turkey sausage with cabbage, carrots, spicy mustard and special tamarindo chutney on a pretzel bun. (Dave Rossman photo)Dave Rossman/FreelanceShow MoreShow Less
Mario B. Morales took to the streets of Houston with gusto and his uncle's specially smoked meats. He entered the food truck rush aspiring to one day own a restaurant and multiple food trucks. But he lacked a critical component: bank financing to get his dreams rolling.
Like many startups and small-business owners, Morales found banks unwilling to finance his fledgling operation. So he turned to microlender Accion Texas for a $5,000 loan. That money was used to help purchase a quieter, more powerful generator to get Yummy Dog, serving gourmet sausage dogs, the business kick it needed.
Microlenders, like Accion Texas, are helping startups and small businesses that can't get loans from mainstream operations. It's fulfilling a niche, and demand is growing.
"If you have a passion for something, like I do for smoked meat, it's a great opportunity," Morales said. Microlending, also called microfinance, is issuing small loans that ideally help businesses build credit, create jobs and enter the mainstream financial system. The underwriting is more flexible than banks, and the loans often come with hand-holding and educational tools.
And several Houston microlenders have reported growing demand. Accion Texas said this market recently had a record month for lending, and a microfinance education program with the University of Houston is completely filled through fall 2015.
"I think the need has just continued to grow, and it's not going to change anytime soon," said Richard Gianni, regional vice president for the East Texas region of Accion Texas.
In August, Accion Texas' Houston region disbursed about $450,000 in loans - its highest monthly amount ever. And from January to August, the region issued $2.6 million in small-business loans. That's a 51 percent increase from the about $1.7 million that the Houston market disbursed during the same period in 2013.
Lea Bogle, president and CEO of Premier Wireless in Stafford, was part of this record-breaking month. She received a $50,000 loan. Premier Wireless is a Sprint authorized retailer, business dealer and service center.
Bank rejection
Bogle was turned down for a bank loan because she doesn't have traditional assets that lenders want. She doesn't own the building, and she can't use the store's products for collateral because Sprint has first lien, meaning it has the right to recoup the store's products if her business goes under.
Working with Accion Texas, she said, was easy, and its interest rates were competitive. Bogle used the money to hire two new employees, increase inventory and expand the store's accessory line. This has already increased revenue, which grew more than 40 percent in September compared with an average month this year. In October, the store is on track for an 85 to 100 percent increase compared with an average month.
"Texas is booming in business, and it allows us to take advantage of it," she said of the loan.
Microloans at Accion Texas range from $500 to $250,000, and the average loan in the Houston market is $21,000. Fixed interest rates range from 7.25 percent to 18 percent.
Accion Texas receives money for lending through partnerships, grants and low-interest lines of credit. It also has investors who receive interest rates between 0 and 2 percent. Gianni said these individuals invest less for the returns and more because they believe in Accion Texas and its impact on the community.
Channels for capital
Mark Winchester, acting district director for the Houston office of the U.S. Small Business Administration, emphasized how SBA microlending helps small businesses start and grow. He said the SBA provides capital through several microloan intermediaries in the Houston area, including Accion Texas, PeopleFund, New Covenant Capital Corp. and Alliance for Multicultural Community Services.
However, Winchester said it's important to be diligent when visiting microlenders. As with any loan, borrowers should ask about interest rates, fees - such as application, guarantee or servicing - and other terms being offered. He said microloans generally have higher interest rates than conventional commercial loans.
He also warned against taking loans that aren't big enough to get the business up and running. If the borrower doesn't qualify for the full loan amount, Winchester said, settling for a smaller amount could set the business on a path for failure.
Building knowledge
In addition to loans, many microlenders say education is integral to their operations. They do a lot of mentoring and hand-holding to assure loans are put to good use.
Marlon Mitchell, president of Houston Business Development, which also runs a business incubator, holds workshops and seminars and provides one-on-one business counseling, agreed that education is important.
"You can give somebody access to capital," he said, "but if they don't know how to manage that capital, then they'll soon be out of business."
Through its Small Business Loan Program, Houston Business Development issues loans ranging from $5,000 to $500,000. It only considers $5,000 to $50,000 as microloans. For every $35,000 it lends, Houston Business Development expects one full-time job to be created within two years.
"I think we play a very vital role," he said of microlenders. "Small business is the engine of our economy."
The poor in Houston
While many associate microlending with impoverished communities overseas, Saleha Khumawala is using microlending to help underserved and poverty-stricken communities in Houston.
Khumawala is founding director of the Micro-finance Program at the C.T. Bauer College of Business at the University of Houston. The program initially started with academic courses and a focus on projects overseas, but then it saw a very real need in Houston.
"We were going to do microfinance right here, locally in Houston, because there's so much poverty in our backyard," she said.
The university's program doesn't give loans but instead offers a free 12-week entrepreneurship education program in underserved communities. The program, booked through fall 2015, is taught by UH students who give participants one-on-one mentoring and business consulting. At the end, the program helps participants access microloans.
"Education is the backbone of any economy," Khumawala said.
And while microlenders have more flexible underwriting - allowing them to help these startups and small businesses ineligible for bank loans - there are still requirements for borrowers to meet.
Rocio Vallejo, director of lending for Austin-based PeopleFund, said startups are required to show business plans, projected finances for the business and personal finances, such as tax returns. Businesses operating at least two years must show past financial records for both the business and the business owner. There may also be additional questions and considerations based on the specific industry.
"Through our process, we review each loan request on an individual basis," she said.
Local average: $40,000
PeopleFund loans range from $500 to $250,000. The average loan size across Texas is about $70,000. In Houston, that number is roughly $40,000. PeopleFund opened its Houston office in 2012, and more people are becoming aware of this location. Demand here is rising, particularly from a new program that helps veterans receive low-interest loans and business education, Vallejo said.
Across the state, PeopleFund issued about $3.3 million in loans last year. That's a 51 percent increase from the $2.2 million issued in 2012. And like the other microlenders, PeopleFund accompanies these loans with educational resources.
"Not only do we want to give them a loan and wish them luck," Vallejo said, "but we want to help them be successful."
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Andrea Leinfelder is the space reporter for the Houston Chronicle.
Andrea writes about NASA and the commercial space sector, where her coverage spans human spaceflight, robotic exploration and operations in low-Earth orbit. For six months of the year, she keeps an eye on the Atlantic hurricane season. Andrea graduated from the University of Florida in 2012 and has lived in Houston since 2014. She enjoys traveling, eating her way across Houston and walking her dog Lizzy.