(Photo Credit: Grameen America)
Teresa, a food cart vendor in Oakland, is one step closer to achieving her dream of putting her son through college, thanks to a $1,500 loan from Grameen America. The microloan helped her purchase a light that allows her to operate her cart selling fresh fruit and delicious Mexican specialties, like corn pudding, well into the evening. Using the additional revenue generated from operating a few extra hours each day and a subsequent loan from Grameen, Teresa (pictured above) hopes to buy and staff another cart in Alameda.
Teresa is just one of more than 16,000 women nationwide Grameen America has helped start and build a small business through the disbursement of over $85 million in microloans since opening its doors in 2008.
Five years since the economy took a nosedive, the credit market remains tight. Even though banks are slowly loosening the reins on lending, limited access to capital remains the greatest challenge faced by aspiring entrepreneurs. Grameen America, a nonprofit microfinance organization, is stepping up to fill the lending gap in underserved communities.
The U.S. offshoot of the iconic Bangladeshi bank founded by Nobel Peace Prize recipient Muhammad Yunus, Grameen America is dedicated to alleviating poverty by distributing tiny and affordable small-business loans to low-income entrepreneurs. The micro-lender, with branches in Los Angeles and Oakland, targets the poorest of the poor, unbanked women living below the poverty line.
While California boasts the greatest number of millionaires, it also faces the highest poverty rate in the nation with nearly a quarter of the population living on less than $23,000 a year.
The tough job market and wage stagnation has many Californians turning to self-employment as a means to generate supplemental income. But lower income residents face much greater obstacles to acquire adequate capital to start viable businesses.
Low-income residents tend to squirrel their money away under the mattress rather than in a bank account, making it difficult to build enough savings and the credit history required to take out a loan to kick-start a business.
“Poor communities don’t have the same access to banks,” said Nicole Meyers, Associate Director of Strategic Development for Grameen America. People in poverty tend to live in banking deserts and feel intimidated by language barriers and a lack of financial knowledge. The 7.8 percent of Californians that are unbanked have literally no access to credit aside from expensive predatory lenders.
In an effort to mitigate the impact these barriers have on entrepreneurship, Grameen America requires clients to participate in a one-week financial literacy and business training course before applying for a loan. Each participant then gets access to a free savings account with a mandatory $2 minimum weekly contribution.
The organization’s stellar loan repayment rate of 99 percent can be attributed to its group-lending model which fosters accountability and creates a peer support network. Borrowers are obligated to form groups of five and commit to weekly meetings to discuss their businesses and make loan payments and savings deposits. Failure by one member to repay their loan jeopardizes larger subsequent loans for all group members.
The maximum initial microloan offered is $1,500. Despite being small, these tiny loans have a huge economic impact. Each loan, used to purchase items like a sewing machine or chair rental at a hair salon, generates $2,500 in additional income, said Meyers. “For our borrowers who live on $12-15,000 per year, the 15 percent boost in income can be life changing.”
In addition to the effect on income generation, one in five borrowers creates a new job. “Jobs created by Grameen America businesses jumpstart local economies and trigger a ripple effect at the local, state and national levels,” said Meyers.
Serving over 900 borrowers, Grameen America’s Oakland branch is the fastest growing in the country, demonstrating the tremendous demand for capital among the state’s impoverished families. Access to a steady and reliable source of working capital can means the difference between success and failure of a new business.
A robust small business sector and growing middle class are vital to the strength of any economy. Encouraging entrepreneurship among the state’s low-income population fosters job creation, income generation, and social mobility. Removing barriers to obtain capital ensures aspiring entrepreneurs can start and grow the small businesses that will reinvigorate California’s sluggish economy.