Small Business and Entrepreneurship Resource Center
Insights from the Field
Perspectives from Leading Practitioners and Researchers
Interview with Gary L. Lindner, President and Chief Executive Officer, PeopleFund
Fourth Quarter 2010
Dallas Fed: What have been the biggest successes and challenges that your clients have faced since 2009? What successes and challenges do you expect in 2011?
Lindner: Banks aren’t renewing some loans or lines of credit, so we have stepped in for businesses that meet our lending criteria so they can continue to operate and prosper. We have also helped by extending lines of credit or consolidating clients’ debt.
We do a lot of work with sole proprietors who typically use credit cards with interest rates as high as 21 percent. We also see a lot of people who are entrepreneurs by necessity (financial reasons), not necessarily by desire. We enjoy working with these business owners because they tend to have real world experience and are resourceful. They also represent a growing market. According to the Ewing and Marion Kauffman Foundation, business startups are at a 14-year high, which represents a huge potential for job creation.
The challenge for our clients is sustaining their businesses, particularly if they are in the service industry like nail salons, pet grooming, etc. Consumers have gotten tighter with their money so do not have as much discretionary funds. We work with these clients to modify their loan terms to keep them solvent and in business. We have seen both successes and losses, and our loss rates are a little higher than in the past.
In 2011 we expect to see a continuation of these successes and challenges. The challenges may become even tougher, as we are seeing foreclosures and bankruptcies taking a higher toll on clients than in the past. We do not see this problem subsiding soon.
Dallas Fed: What have been the biggest successes and challenges that PeopleFund has faced since 2009? What successes and challenges do you expect in 2011?
Lindner: We are doing a lot more tandem loans with the Texas Mezzanine Fund and other community development lenders to spread the risk among us.
We also are putting out a variety of loan products that are responsive to clients’ needs. There are a number of consistently successful solid businesses, but they do not have the collateral that banks require. They tend to lease their properties—not own them—and put revenue back into their business. We have created a loan product modeled after the Texas Capital Access Fund, which is no longer funded. In this product, 7 percent of the loan value is put in a loan loss reserve pool, and the borrower does not get any of that money back; the pool pays for losses.
Another loan product we offer is a lower interest rate if the loan meets our green (environmentally friendly) criteria. This product mirrors the Appalachian Community Enterprises' green loan program.
Our challenges are increasing our scale and reducing our transaction costs. Right now there are too many redundant activities in our loan review process. The loan officer, underwriter and loan committee are involved, and we should be able to increase the speed of our process. Another challenge is to bring more talented people on board to effectively go out and make loans.
In 2011, we expect to see a continuation of 2010’s successes and challenges. For example, we focus a lot on daycare centers and get good results. Our support of them has a direct impact on the workforce for dual-income and single parents.
We also lend to organizations that create jobs in low- and moderate-income census tracts, such as nonprofits that provide health services.
Our plan is to grow from being a $10 million organization to a $100 million organization, so we are working to expand our geographic reach to the rest of Texas. This is an opportunity that we have not had before. We have an affordable housing consulting contract with Dallas, and Houston has expressed interest in our services, too. We will start making loans in Dallas and Houston because of existing opportunities, too. By expanding our market to the rest of the state, we will be able to improve our productivity.
Dallas Fed: What impact do you anticipate the Small Business Jobs Act of 2010 to have on you and your clients?
Lindner: It should have a positive impact because it makes SBA loans inexpensive sources of capital. The closing fees are waived for the SBA’s 504 loans, and the guarantees for the SBA’s 7a loans will serve as powerful incentives to make these loans.
This legislation also improves the SBA’s microloan program by increasing the maximum loan size to $50,000 (it was $35,000) and increasing the amount a microlender can have in circulation at any given time up to $5 million (it was $3.5 million).
Dallas Fed: What have we not yet discussed that you think is important to bring up, particularly to industry analysts, your constituents and/or policymakers?
Lindner: The SBA’s 7a loans and other SBA products have guarantees, but its microloans do not; they need to give these guarantees. To reduce the risk of making microloans, we need at least 20–40 percent guarantees.
Also, nonprofit organizations, including PeopleFund, need tax relief. We are a 501(c)(3) but are taxed on the property we own. We pay over $65,000 in property taxes annually. This is a problem for any nonprofit in Texas that owns property, so it is a shared concern.
I am board chair of the Association for Enterprise Opportunity (AEO). Its mission is to support the development of strong and effective U.S. microenterprise initiatives to assist underserved entrepreneurs in starting, stabilizing and expanding businesses.
I would like to share some of the most recent aggregate data we have on microentrepreneurship. It is from July 2010.
Microenterprise development programs
- There are nearly 700 microenterprise development programs in the U.S., serving an estimated 300,000 individuals per year.
- Fifty-seven percent of microenterprise clients are women, 53 percent are people of color and 57 percent are low-income.
- Typically, AEO members provide classroom business training, one-on-one business coaching or mentoring, networking opportunities and access-to-markets programs.
- AEO members are experts in business plan development, microcredit (small business loans of $50,000 or less to start or grow a business), marketing, licensing, taxes, business management, financial literacy, legal needs, technology and insurance.
- Sixty-eight percent of the nearly 700 microenterprise development programs in the U.S. provide microloans.
- AEO members reported that demand for technical assistance and business services increased 55 percent on average since May 2008.
- Entrepreneurship is an alternative for laid-off workers; as unemployment rates rise, so does the demand for microenterprise support services, including microloans.
- Small businesses working with microenterprise development organizations grow jobs in their communities at a rate of 3.5 per year.
Impact of Microenterprise
- There are an estimated 25 million microenterprises in the U.S. today, representing 18 percent of all employment and 87 percent of all businesses.
- On average, microenterprises create 837,000 new jobs per year.
- AEO and the SBA define a microloan as a loan that is up to $50,000.
- The average microloan is $11,000.
- Interest rates range between 5 percent and 18 percent. Rates vary by product, risk rating of the client and the availability of a subsidy by a funder.
- Microloans specifically target aspiring and existing entrepreneurs who would otherwise face difficulty obtaining access to capital.
- Prior to the recession, AEO estimated that 10 million entrepreneurs faced difficultly obtaining business capital. We now estimate that number to be closer to 20 million.
- AEO members reported demand for lending had increased 48 percent on average since May 2008.
- In fiscal year 2009, SBA microloan program intermediaries disbursed nearly 3,000 loans, totaling $23 million, to microenterprises.
- Fifty-eight percent of AEO members reported that more capital for loans was a top need to meet the increased demand.