From the October 2003 issue of Startups

Jim and Georgia Thompson didn't go into business to get rich. They went into business because it looked better than working for someone else. "It's not exactly that we didn't like the people we were working for," explains Jim, 45. "But we were doing all the work and weren't getting any of the rewards."

So in June 2001, the father-daughter team started JJ&G Electric, a two-person electrical contracting company in Austin, Texas. Both were veteran electricians, and Georgia, 21, had experience running the office at the electrical contractor where they'd both formerly worked. But they quickly found that running a small business was different from wiring a building. "We had the electrical skills. We had the office skills. We also had the people skills," says Jim. "But we had little knowledge of the financial skills and skills of running a business."

In that sense, the Thompsons are typical microenterprise owners. These popular but little-recognized businesses, numbering an estimated 2 million, are generally categorized as those requiring less than $35,000 in start-up or early-stage financing. They usually have fewer than five employees, especially in the early years, and are often sole proprietorships. Microentrepreneurs face a special challenge, because few lenders will consider making such small loans, especially to start-ups that lack adequate collateral. Microenterprises are likewise challenged by the fact that they're often run by people who, while boasting excellent technical ability, don't know much about marketing, bookkeeping, cash management and other key business skills.

Fortunately, a range of organizations can help with both skills and capital. And coupled with microentrepreneurs' drive and determination, the microenterprise story is one that generally has a successful run and a happy ending. Why? One reason is that microbusiness owners typically come from low-paying jobs, unemployment, underemployment or public assistance programs. They often start as part-timers, moonlighters from day jobs or work-at-home moms. With powerful motivation and a modest growth plan, they more often than not get what they're after.

Take Angela Nicholas, for example. She started Bauer Triple D's Learning Complex Inc. in Pensacola, Florida, because she couldn't find a job in the public schools, after her husband, a Naval officer, was transferred to Pensacola. "I never planned to go this route," says Nicholas, 42. But when she looked at a plot of land near her home and envisioned children playing in a child-care center, she was inspired. After receiving business training from a local development agency, she successfully applied for a combination of bank loans and community development funding that allowed her to open a center. Today, she employs nine teachers.

Nicholas enjoys making her own decisions, something she was never able to do as a physical therapist and administrator in the public school system. And she feels she's building something for the future. "I'm not seeing the rewards immediately, but in another 10 or 15 years, when I'm finished paying off my mortgage, I'll see them," she says.

Most microentrepreneurs cite similar benefits of independence and potential for building wealth, says Dawn Rivers Baker, editor of The MicroEnterprise Monthly, a microbusiness journal in Sidney, New York. "Most of them are earning $20,000 to $50,000 a year, though there's a nice chunk of them who are earning over $100,000," she says. "But if people were to do this for financial reasons, nobody would do it. They do it because they like it."

The Financing Hurdle

But liking microbusiness isn't enough to overcome some of the more substantial obstacles. Of these, lack of access to capital is probably the biggest. Microbusinesses are, as a rule, not suitable for bank loans and can't tap other financing sources, such as venture capital and the public markets. Savings, investments from family and friends, and personal financial options, such as credit cards, are the only options for most microbusiness start-ups. "It's a lot easier to get $50,000 to buy a car than to get $2,000 to start a business," says Rivers Baker.<

There are sound reasons why micro-businesses can't borrow from banks. "The key thing is that the loan amounts are too small," explains Jeannette Peten, president of BiGAUSTIN, a community development organization in Austin, Texas. Banks can't make enough money on loans under $50,000 to justify the loan processing and issuance costs, so they simply don't consider such small loans.

In addition to seeking only small loan amounts, many microbusiness hopefuls are hamstrung by bad credit, no collateral and unproven prospects. Organizations like Peten's fill the gap, specializing in loaning small amounts to people who aren't acceptable credit prospects for conventional lenders. "Someone who's been turned down by the bank because his or her credit scores weren't high enough is usually an excellent client for us," she says.

Microfinanciers tap a combination of private and public funds to offer low-amount loans to people who are rejected by banks. Terms typically run five years or less, with interest rates at about 10 percent. The amounts may be anywhere from a few thousand dollars up to the defined microloan maximum of $35,000. Many of the borrowers funded by people like Peten are referred by bankers, she says. In return, they hope to grow their clients to the point they're considered bankable and then send them back over to the commercial banks who referred them in the first place.

The chances of a small business surviving and prospering to the point it might be considered bankable aren't bad at all, according to SBA figures on the 5.7 million firms that had employees. In 2001, the latest year for which figures are available, an estimated 584,400 new small businesses started, while 568,300 closed, including 39,719 bankruptcies. Both closures and starts were about 10 percent of the total, the SBA notes.

Two-thirds of new firms last at least two years, and half make it to their fourth anniversary, according to a 2001 study by the Census Bureau. One interesting point found by the Census study: One-third of the people who shut down their firms in the first four years said that their firms were successful at the time they were closed. The study also found that a desire to be one's own boss and to have freedom for family life correlated with higher success rates for business owners.


On the Money
Microbusiness owners in search of financing may be shut out of banks, shunned by venture capitalists and ignored by public markets, but there is a rich cornucopia of little-known public and private organizations and agencies they can go to for loans and other assistance, including:You can find a long list of links to sources of advice, assistance--and cash--at the Web site for the Association for Enterprise Opportunity.

Learning the Ropes

Access to capital solves about 75 percent of the problems faced by microentrepreneurs, says Dan Horvath, president of Community Equity Investments Inc., a microlending and assistance organization in Pensacola, Florida. The other 25 percent is, essentially, ignorance. That's why organizations like Horvath's offer training in business skills, such as marketing and business planning, and technical assistance in bookkeeping and accounting.

Microborrowers are often required to attend training classes as a condition of receiving a loan. Classes may be offered through a microlending organization or through a local Small Business Development Center or community college. They typically consist of a few months' worth of twice-weekly sessions and wind up with the microentrepreneur receiving a foundational understanding of bookkeeping, taxes, marketing and other skills. One central goal is the creation of a business plan to guide the firm's operation and to present to potential lenders. "We put the reality back into the process," says Peten. "We let them know it's not about being the next Bill Gates. All they have to do is start a business."

Microentrepreneurs often clear up some critical misconceptions during the training process. For instance, JJ&G Electric's founders, after getting started with no more financing than some personal savings and trade credit at a local electrical supply house, had expected to obtain bank financing simply by showing a banker a contract for a project they had signed. "I found out from BiGAUSTIN that wasn't true," says Jim Thompson. "There were several things we thought were true that weren't."

Fast Forward
Many microbusinesses are small by the owner's choice and are intended to remain that way. "We do not plan on expanding," says Adam Makela, owner of Parkside Elder Care, a five-bed home for the elderly in Plainview, Minnesota, that employs only himself and his wife. "Bigger is not better in this business, and it's important for us to feel good about the services we provide." Makela plans to keep running the business as it is for another 15 to 30 years and invest profits in real estate to provide for a secure retirement.

But not all microbusinesses stay small. The Thompsons today employ 20 people. Some microbusinesses grow even larger. One of Horvath's clients, a metal stamping firm, started with a $25,000 loan and three employees and today has 40 employees and sales of $2.5 million.

And in some cases, breakthrough microbusinesses exceed their owners' expectations by a wide margin. One of Peten's clients began a postal services retail operation after being laid off. Though his only intention was to replace lost income, before long, he was entertaining buyout offers from a national postal franchise. Another started with a $10,000 loan and a dream of building a profitable business he could sell to become financially independent. Four years later, he sold his company to a multinational conglomerate for a sizable sum.

One blessing of microenterprise is that it gives people a taste for entrepreneurship; many like the life so much, they go on to run a string of small but successful enterprises. Makela began his first elder-care center in Grand Rapids, Minnesota, and operated it for five years. Then he and his wife decided business ownership had lost its luster and sold the center. But after only a year or so, they found they missed the flexibility and independence of running their own show and found an existing center they could take over.

"This type of business is certainly not for everyone," says Makela. "We both work almost every day for at least part of the day. But, at the same time, we have a lot more time and money for our hobbies, recreation and our [children] than most people do." Those attractions are what keep microbusiness blooming despite the obstacles.

And microentrepreneurs say the view from the other side of those obstacles makes getting there well worth the trouble. "If you believe you have the talent to make a difference in whatever business you choose to pursue, you should go for it and not be fearful of the outcome," says Nicholas. "A lot of people have great talent and vision, but they're so fearful of failure that they don't step out and try. But the worst that can happen is, you try again."


Do the Right Thing
Microbusiness is a tool for reducing poverty and getting people off welfare through business ownership. That's why governments, nonprofits, private philanthropists, charitable organizations and public-minded businesses support microenterprise assistance programs. The typical client of a microenterprise assistance program is unemployed or underemployed and often receiving some kind of public assistance. Helping these clients get a business up and running is seen as a way to reduce demands on public resources, while increasing household and community income by creating jobs. "We try to not only help the business owners be more self- sufficient, but also to employ others and increase the income in their community," says Jeannette Peten, president of BiGAUSTIN, a community development organization in Austin, Texas.

The benefits of microassistance programs land disproportionately on low-income borrowers. Dan Horvath, president of Community Equity Investments Inc. (CEII) in Pensacola, Florida, says 65 percent of his community development organization's borrowers are low-income. CEII has made 380 loans in 20 years of operation, according to Horvath, and the microloan program, representing loans under $35,000, represents 7 percent of all loan losses the fund has sustained. Considering that these loans are usually made to people with limited or no collateral or shaky credit histories and that the SBA-mandated loan-loss maximum is a comparatively high 15 percent, Horvath says companies helped by the loans seem to be surviving and succeeding. "A lot of them go out of business but don't necessarily fail," he adds. "They may just decide that being in business is not for them."


Mark Henricks writes about business and technology for leading publications and is the author of Not Just a Living.