Out of Africa
WHEN SUZZANNE PLAISANCE decided to supplement her part-time income from nursing with sales of a coloring book she had designed, she borrowed $500 from her sister and talked a copy shop into extending her credit for 30 days. Today, the single mother's company, Snapdragon, employs 10 workers at its Winona factory and is gearing up to distribute its puppets, masks, and "Tooth Fairy Pockets" on a national scale.
Like most small businesses, Snapdragon thrives on the long hours, light living, and entrepreneurial drive of its founder. But Plaisance credits an extra boost from a lending organization called the Foundation for International Community Assistance (FINCA). "I couldn't have done it without FINCA," she says. "I was a single mom without any resources and they gave me the possibility to take out a loan and build up some credit."
If you've heard of FINCA it's probably in connection with its work overseas in the developing nations of Africa and Latin America. Since its founding in 1984, the organization has become a major international player in what's known as "micro lending." FINCA and organizations like it set up community banks that lend very small amounts of start-up money to Third World villagers. It's acronym means "farm" in Spanish, a holdover from its original thrust--small-scale agricultural development. "In a lot of these countries there is no credit alternative for low-income people except the village money lender who's going to charge them 30 or 40 percent interest."
The United States, meanwhile, offers more opportunities for borrowing, but interest rates for start-ups can still be prohibitive. So, three years ago, FINCA decided to try out the program here, where credit is out of reach for low-income entrepreneurs. Without successful track records or formal training, would-be business owners like Plaisance sometimes turn to credit cards for the small amounts of capital they need to get started.
With the forming of FINCA USA, micro lending became one of the first major financial-development ideas to be imported from the Third World. In two years the Minnesota branch has collected 45 members at eight rural locations. A normal bank might turn up its nose at the typical FINCA creditor, but the default rate is tantalizing: In Minnesota, the on-time repayment rate sits currently at 98 percent. Assuming funding comes through, Kim Hunter, state director of FINCA Minnesota, expects to bring village banking to the Twin Cities this year.
At the heart of FINCA's methodology is a concept known as peer lending. "The borrowers act as both bank managers and bank customers," Hunter says. Each community forms a group that approves loan applications and meets monthly to swap advice and collect payments. Requirements are minimal: You must have a business or a viable plan, be 18 or older, and provide personal references. There are no credit checks, no income guidelines, and no collateral besides a small contribution to the group's collective savings account, used to cover defaults. First-time borrowers are eligible for loans up to $500. Once this original loan is repaid they can borrow more, eventually becoming eligible for up to $6,000.
The conversion of a Third World program for U.S. consumption hasn't been without difficulty. In the developing world, FINCA's average loan is $190. In Minnesota, start-up funds for new businesses typically run to thousands of dollars. And once businesses are established, they face a plethora of technical and regulatory problems. Overseas, groups range from 20 to 70 people; in Minnesota the average size is just six.
Peer support is what makes FINCA different from other small-business incubators. "At most banks if you were to get a business loan, you'd sign the papers and you'd be out the door and then it's sink or swim," Hunter says. FINCA, by contrast, continues to be involved, via the community bank, with a borrower's business--"a vast difference from the overseas lending program," Hunter says. For Plaisance, the technical support has proved as valuable as the loan. The community bank hired marketing and accounting consultants she could never have afforded on her own.
Plaisance says FINCA has made the difference between borrowing from her sister and establishing the kind of credit history that has made her attractive to commercial banks. "I would like to be able to tell you that I'm making loads and loads of money, but I've put everything back into my business," says Plaisance. "But the numbers are looking so wonderful, that I might be able to give myself a raise next year."
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