With credit still tight, more mom-and-pop businesses turn to microlending

The only problem was money.

Fochler wanted to convert an old drugstore into a paradise for pets, complete with retail products and dog training. But those plans collided with the most severe financial crisis in a generation, and credit froze up. At one point, Fochler said, his bank refused to release the money needed to complete the construction.

To help plug the gap, Fochler turned to the Latino Economic Development Corp.’s nascent microlending program, part of a growing network of financial institutions that specialize in small loans to mom-and-pop operations. The average size loan is $10,000 at 10 percent interest, said lending director Rob Vickers. Many banks will not consider business loans less than $200,000, he said.

Microlending first became popular as a form of foreign investment in poor, emerging markets. Before joining the LEDC a few years ago, Vickers was a microlending specialist in Latin America for the World Bank. Microlending has been slower to take off in the United States, especially because many consumers have credit cards and lending requirements were lax.

But tightened standards have pushed many consumers out of the traditional banking system. In a survey of 16 microlenders by Opportunity Finance, a network of financial groups, 81 percent reported that applications for small-dollar loans increased during the fourth quarter, compared with the previous year.

“We’re seeing a lot of demand from formerly ‘banked’ businesses that are now looking to us to meet their needs,’’ said Mark Pinsky, chief executive of Opportunity Finance.

In addition, the Internet has created a niche of microlending that allows businesses to appeal to everyday consumers for capital through peer-to-peer lending. Renaud Laplanche, chief executive of the Lending Club, said small businesses account for about 10 percent of loans made on his peer-lending site, with the average amount at $18,000.

Fochler said that even staff members at the LEDC were surprised he could not qualify for a bank loan. He reported record sales each year, with growth rates averaging 170 percent. The pet day care is profitable. Fochler employs 25 people. But he said that after the financial crisis, banks wanted to see matching assets as well as profits.

Vickers said the LEDC considers not only standard criteria such as credit scores but also the entrepreneur’s ability to pay. And it helps borrowers separate personal expenses from business ones, typically a tangled web for small businesses. “We are obsessed with making good loans,’’ Vickers said.

Ylan Q. Mui writes for The Washington Post.