Extending the Ladder: How microcredit expands economic opportunity

This post was written by OK Policy intern John Davis. John recently graduated from Oklahoma State University with a bachelors in political science and a minor in history. He enjoys researching and writing on a diversity of topics and looks forward to continuing his education.  

Small businesses, particularly very small businesses, are a critical component of Oklahoma’s economy.  Microenterprises represent a distinct subset of small business, those with 5 or fewer employees and start up costs of under $35,000.  They comprise the bulk of businesses nationally and locally – 88 percent of Oklahoma’s 345,630 businesses are microenterprises.  One way Oklahoma policy makers can empower and sustain this economic activity is to strengthen microenterprise development organizations, which provide access to affordable credit, often essential to starting or expanding a business. 

‘Microcredit’ refers to small commercial loans made to individuals seeking to start or expand a microenterprise.  Many microenterprise owners lack access to mainstream financial services, because their capital needs are too small, they have insufficient credit history, or their enterprise has not been in operation for a sufficient amount of time.  This post explains how expanding microcredit options can empower owners and entrepreneurs and boost economic growth in Oklahoma. Microenterprises are a significant part of our overall economy, and an important avenue for low- and moderate-income individuals to move up the economic ladder.  CFED (Corporation for Enterprise Development) President Bob Friedman, highlighted the importance of microenterprise startups:

The National Bureau of Economic Research and the Kauffman Foundation have recently reported, businesses under one year old, start-ups, have created an average of three million new jobs each year for 30 years, more than the net job creation of the whole economy.

Microenterprise development programs are a major provider of microcredit in the U.S., with over 700 organizations, including two here in Oklahoma: the Tulsa Economic Development Corporation and the Citizen Potawatomi Community Development Corporation. These programs typically provide direct financial assistance, training and technical support. Many of them also report to credit bureaus to improve clients’ credit ratings to assist with future access to credit.  Entrepreneurs seeking to start, expand, or transition a microenterprise, who lack the credit history or credit rating for financial backing, need this kind of assistance to gain access to affordable credit.    

An Aspen Institute survey found that 57 percent of those currently served by microenterprise programs were women, 53 percent were people of color or members of historically disadvantaged groups, and 57 percent were low-income.  There are 11 to 15 million small businesses operated by low-income entrepreneurs, in addition to over a million new startups each year, for which access to credit is a major barrier to their creation, growth, and sustainability. According to the Association for Enterprise Opportunity, microlenders are reaching just 2 percent of those in need of their services.  Clearly, there is a significant unmet demand for the kinds of services offered by microenterprise development assistance programs.

Part of the reason for the lack of coverage is due to high operational costs for lenders, which limit expansion efforts of microlending institutions into underserved markets.  Nonprofits like ACCION USA are expanding microcredit’s reach with technological solutions that lower the cost of lending, such as online loan applications. Collaborating with community-based organizations can reduce marketing costs.  Diversifying funding by including corporations willing to make socially responsible investments can shore up lending capital and help cover operational costs.  

States can expand access to microcredit by providing assistance and support to microenterprise development organizations, which help entrepreneurs get their businesses off the ground.  CFED details policy recommendations for states:

• State funding for microenterprise development, or codify its support for microenterprise in law identifying microenterprise as a priority for the state, and thus laying the groundwork for future funding.
• Support microenterprise development with federal block grant funds, Temporary Assistance to Needy Families, Workforce Investment Act,  and the Community Development Block Grant all have provisions that allow states to use federal money to support microenterprise development and services to entrepreneurs. 
• Allow beneficiaries of all public support programs, from welfare to unemployment compensation to Social Security, to pursue self-employment without abruptly losing benefits.

Microenterprise in Oklahoma requires additional assistance to foster creation and growth.  Since they currently make up 88 percent of the state’s businesses and employ 23.3% of its workers, they’re a critical part of our economy.  Expanding access to microcredit options in Oklahoma can empower entrepreneurs and boost economic growth by creating employment and providing a better foundation for residents to grow income and assets. By providing support to microenterprise development organizations the state is creating a bank of skills and assets that can assist the state’s entrepreneurs in navigating the difficult process of turning an idea into a business, and a business into a sustainable success capable of lifting individuals, and whole communities out of poverty.