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NOVEL WAYS OF RAISING SMALL LOANS
Perhaps it does not matter too much if a small business has to pay a relatively high rate of interest if it can raise a loan when it needs one urgently and if the interest it pays stays within the community. This was certainly the case when Frank Tortoriello's popular delicatessen in Great Barrington, Massachusetts, faced closure in 1989 because no bank would advance him $4,500 to move to new premises when his lease expired. Fortunately, Tortoriello knew Susan Witt, who runs SHARE - the Self-Help Association for a Regional Economy - from the offices of the E.F. Schumacher Society in the rolling wooded hills about five miles out of town. And fortunately, too, Witt knew that a Massachusetts newspaper, the Springfield Union News had survived after a 1930s bank failure closed its operating account by paying its staff in its own notes which they spent with local merchants who used them in turn to buy advertising space. She also knew that a restaurant, Zoo-Zoo, had issued its own notes in Oregon in 1977 when faced with a situation similar to Tortoriello's.
"SHARE suggested that Frank print his own currency - Deli Dollars - and sell them to his customers in order to raise the capital he needed to renovate the new spot" Witt says. "What he did was to presell meals to his customers. He sold a $10 Deli Dollar for nine dollars in October, to be redeemable at the new business once it was renovated for ten dollars' worth of sandwiches. However, to ensure that all the Deli Dollars didn't come in during the first month, they were dated over a ten-month period." This meant that the rate of interest Tortoriello paid ranged between 44% per annum on a four-month Dollar, the earliest maturity sold, to 13.3% on one due in ten months. "To Frank, though, it was a low interest loan because he was paying back in sandwiches rather than Federal dollars" Witt says.
"I put 500 notes on sale and they went in a flash" Tortoriello told a Washington Post reporter. "Deli Dollars turned up all over town. It was astonishing." One was even put in the collection plate at the local Congregational Church because the minister frequently ate at the Deli. "Frank's customers liked helping him move" Witt comments. "They felt that they were beating the system by keeping the business open through their own efforts. Even people who never ate there bought Deli Dollars to help out."
Dan and Martha Tawczynski, who run an organic market garden in Great Barrington and sell most of their produce from their own roadside shop got the details of the scheme from their daughter, Jan, who was working at the Deli at the time. They wondered if they could do something similar. "During the winter months they have high heating bills for their greenhouses growing plants for spring and summer" Witt explains. "They thought perhaps their customers would help them by pre-buying plants in the same way that the Deli customers were pre-buying sandwiches. At about this time Donald and Ruth Zeigler's roadside farm shop was badly damaged by fire. The two requests for help came to SHARE simultaneously and we suggested the two farms work it out together. Out of this grew Berkshire Farm Preserve Notes, which were sold and redeemable at either farm, so it was more of a currency than the Deli Dollar. The Notes had different redemption dates between June and October. If one farm accepted less Notes than it had sold, it had to pay the other farm for them. The Zeigler's ended up with about $70 more than their share and took payment for them in Dan's organic potatoes, which are particularly good."
The issue raised over $7,000 and has been repeated each year since. "I think it would have been impossible to survive without the Notes" Dan Tawczynski says, looking out over land which was once farmed but where the forest has now grown back. The Zeigler's also appreciate what the scheme has done: "We have a special pick-you-own day for Farm Preserve Note buyers" Ruth says. "We send out invitations in May."
More recently, SHARE has helped a village store, a Japanese restaurant and a coffee roasting company to raise capital - and generate extra business - by the print-your-own money route. However, it has another, more conventional way of raising money for small, local businesses - finance which is badly needed because, as Susan Witt points out: "These days, a lot of banks won't touch small commercial loans. Their costs are so high they are often not interested in discussing anything less than $100,000."
Great Barrington is about a hundred miles from New York City and a lot of New Yorkers have bought weekend retreats there. These temporary residents are generally a lot better off than the local people and some of the more enlightened ones feel that they ought to put something into an area which gives them a lot of enjoyment. One way Witt has encouraged them to do so is by lending money to SHARE for collateralising loans to local businesses. "Anyone who wishes can walk into our participating bank - which is locally owned and has a good track record of investing in the community - and open a 90-day notice passbook savings account jointly with SHARE" she explains. "They leave their passbook at the bank so that SHARE can use up to 75% of the amount in it as collateral for loans. The money in the account still belongs to the depositor, who gets the interest which accrues on it and is the only person able to draw it out except in the event of a default. When SHARE has decided to back a loan to someone, we formally lodge enough passbooks with the bank to cover the amount. We have a $3,000 loan limit, although some places which have adopted the SHARE model go up to $30,000, and we only support loans which will lead to greater regional self-sufficiency - food, shelter or energy projects - or the provision of basic community services."
Naturally the bank likes the scheme as it does not have to spend time checking loan applications forwarded by SHARE, which has already done so. Another advantage is that SHARE loans increase the total of local loans the bank can declare to the regulatory authorities, thus winning it benefits under the Community Reinvestment Act. Moreover, as each loan is fully secured, the bank carries no risk and still enjoys a healthy margin between the rate of interest it pays to the passbook depositor and the rate charged to the borrower. "We think its worth allowing the bank to make that margin because of the book-keeping work it saves us" Witt says.
What happens if depositors need to get their money back? "They have to give us 120 days' notice, which gives us time to find someone else" Witt says. "There's never been any problem paying depositors back because of the liquidity we preserve by only collateralising threequarters of the savings in each passbook. However, we do reserve the right to make depositors wait until loan repayments allow passbooks to be released." And what if a borrower defaults? "We haven't had a loss in the seven years we've been operating, but if we did, it would be shared by all SHARE depositors and not just those whose passbooks were lodged as security for the problem loan. In fact, however, we know all our borrowers well and can often help them overcome any trouble."
SHARE's first loan was to a goats' cheese maker, who needed a milking room built to government standards in order to sell her produce to shops and restaurants but had no track record with a bank. "SHARE investors are kept informed about the products they are investing in" Witt says. "They go down to Sue's farm to look at what she's been doing. The little goats are so cute that next time they bring down their grandchildren to see them. The following week they come to get a big supply of cheese for a party. Gradually, the loans they've made begin to work into their social and cultural life. The goat cheese becomes their goat cheese. It takes on a different nature just in their house."
In Australia, where small commercial loans are just as difficult to obtain from banks as they are in the US, James Evans, the director of ESBEC, the Eastern Suburbs Business Enterprise Centre in Sydney, has developed a loan scheme, First Business Finance (FBF) with several features in common with SHARE but which will operate on a much larger scale. It also makes a neat link between local savers and small local firms needing funds.
FBF made its first loans in early 1995. Like SHARE, it aims to help people wanting to start businesses who cannot borrow from banks because they may have no collateral, be unemployed or have only the briefest credit record if they have one at all. A case history given in FBF's business plan is that of a redundant (the Australian term is retrenched) 52-year-old cabinet maker with a wife and three children whose tools had belonged to his former employer, who had never run a business and who had no assets which could be offered as security. As a result, although he was offered several jobs, including a sub-contract from his old company, no bank would approve a loan to enable him to purchase tools and to provide a small amount of working capital
ESBEC helps this type of would-be borrower develop a business plan and prepare a loan application and those applications it is happy about it passes on to Sydney Credit Union which releases the cash - usually between A$5,000 and A$10,000 - without any further investigation. When the scheme began, the credit union charged an interest rate of 12.95%, which was 2% less than its personal loan rate but 4% more than for a fully-secured home loan. "That's its premium for the perceived higher risk in the small business market" Evans says. "FBF is working on the basis that access to capital rather than its cost is the thing that matters for our sort of borrower." The costs of setting up each loan are low - about A$350 - of which $300 can be added to the amount borrowed.
FBF - a joint venture between ESBEC and its neighbouring BEC in Botany, with a number of high-powered external directors - guarantees the loans, but, remarkably, only to the extent of one per cent of the total value of the amount outstanding. This means that it can authorise loans worth a hundred times more than the total amount in its guarantee fund, which was initially provided by the New South Wales government, whereas SHARE can only approve loans worth 75% of the money its supporters put up. "If we do it right, that guarantee money will never be touched" Evans says.
The reason he is so confident that the guarantee funds will stay intact is the level of support the Eastern Suburbs and the Botany BECs offer FBF borrowers. The organisations - and another forty-eight BECs throughout New South Wales - were set up by the state government in response to pressure from Rotary clubs which had seen how well partnerships between the public and private sectors had worked in England during the 1970s. "The government funding for us decreases over time so the BECs must gain funds from the local community" Evans says. "Our core role is to provide a free counselling service to anyone wishing to start a small business, to existing businesses having problems and to those wishing to expand. However, we also get involved in anything which can strengthen the economic capacity or increase employment in the local area."
Many of those using the counselling services eventually join the BECs, which are non-profit companies run by their members who pay a fee based on their turnover, with a minimum of A$240 a year. "Members pay their fees out of enlightened self-interest" Evans says. "Most offer their skills to help our advisory and training service clients and attend the social events, training courses and monthly business workshops we organise. It can be very lonely running a small business but ESBEC gives them the feeling that they are not alone."
Members also make valuable contacts. "Networking is about giving, not expecting something back" Robyn Henderson, the author of a book on networking told them on the night I attended a meeting of over a hundred members in a smart tennis club's lounge. "Business these days is built with people who trust you and with whom you have rapport. Sixty percent of people stop dealing with companies because they thought they weren't valued. Make ten new contacts a day. Be honest and open with complete strangers" she went on, and after her talk it was amazing to see the rate at which business cards were being exchanged. Indeed, although ESBEC developed quite independently, in many respects it is equivalent to the Briarpatch Network in San Francisco, which is discussed in the final chapter.
"We will not be advertising FBF loans in the papers" Evans says. "All borrowers will come from community networks like ESBEC, many of which provide pre-start training, mentors, business advisory services, in-going training and income support in the first year of business. They will all have been helped prepare a business plan and be able to call on continuous support during the operation of their business."
Evans accepts that some people who get loans will cease business before their debts are repaid but does not think that this will necessarily cause them to default. "A 1992 survey showed that 30% of those who ceased business did so because they had accepted a job and our experience indicates that, in any case, they do not accumulate large debts. At present in Australia no-one is lending to micro entrepreneurs on a large enough scale for the risks to be properly assessed. We hope to do that and our target is to prove that this sort of lending is viable so that other places around Australia copy the concept within the next five years."
2002 update on SHARE by Caroline Whyte
SHARE's programme for granting loans to small businesses in the Great Barrington area has been ended because it is considered to no longer be necessary. One of the criteria for getting a SHARE loan was that the loan customer had to have previously been refused a bank loan, and the banks are no longer refusing microcredit loans. Local banks are also currently able to offer lower interest rates than SHARE could, since national interest rates are a great deal lower than they were when the micro-credit scheme started. Susan Witt told me that "these banks are now handling all loans to micro-businesses".
This change in the banks' policies on micro-credit came about partly because of the example of SHARE, partly because of the Clinton government's emphasis on community investment, and partly because the banks are all locally owned and therefore have a stake in making the community prosper. Witt stresses however that "everything is still in place to gear up if necessary", ie if the economy changes and banks are no longer willing to handle micro-credit, SHARE could step in once more.
Witt also comments that "SHARE remains an important organising tool for regions without a good system of locally owned banks". SHARE-type programmes can be established with relative ease because they have no overheads - the bank does all the accounting - and they are easy to administer. In order for these programmes to work, emphasis should be placed on local knowledge and consumers should be willing to help deal with problems. For example, when a member of SHARE who ran a cleaning service was unable to make his payments because it was winter and the people whose houses he cleaned were all away, a local school which was also part of the SHARE programme was able to hire him to clean their premises, thus providing enough income for him to be able to make his payments again. This kind of creative problem-solving meant that the SHARE scheme in Great Barrington never had a loan failure.
Witt comments that there has been in increase in general awareness of the importance of community credit, and that banks are coming to understand their unique role in local economies. But, she says, "it's tough for people to think in terms of community economics rather than personal economics. Many people complain about the behaviour of large banks and corporations, but still rely on them financially as shareholders".
Witt's future plans involve the establishment of a locally-owned currency in the Berkshires. She comments that "local scrip is the future for microcredit". This scrip, like the Ithaca currency, would be based on future labour potential. Loans made in scrip would be productive loans, geared to help people produce more in their business, rather than consumer loans, geared to help people buy more consumer goods. The "Berk-Share" currency would be issued through the banks, who have arranged among themselves to exchange checks in the local currency by simply dropping around to each other's bank branches when the need arises. In this way they can get around the fact that you can't clear local currencies through the federal check-clearing system. Local administrators have also said that they may be willing to take some taxes in the scrip.
Detailed plans for the local currency, as well as an outline of Witt's philosophy concerning micro-credit, are explained in Donald Swann and Susan Witt's article, "Local Currencies: Catalysts for Sustainable Regional Economies". The idea is to provide the scrip at a 10% discount over the first year, ie customers would put down $90 and get 100 Berk-Shares. All these original notes would come due after 15 months. The discount is provided to help people get used to the idea of circulating the currency, and also to allow the banks to become comfortable with it.
Witt and her colleagues are hoping that the currency's first year will be funded by a federal grant. Local merchants would then have enough confidence in the currency to be willing to pay an annual fee for it, which would cover the scrip's budget.
Susan Witt is the Executive Director of the E. F. Schumacher Society. 140 Jug End Road, Great Barrington, MA 01230 USA. Tel (413) 528-1737, email firstname.lastname@example.org
Over a hundred Community Development Loan Funds, modelled on SHARE, have been set up in the US since 1985. Information about these and other Community Development Finance Institutions can be found at www.communitycapital.org . Information about microcredit schemes all over the world can be found at http://www.gdrc.org/icm.Back to main text of Chapter 4
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