With fewer jobs available through on-campus recruiting and job boards, alumni networks are becoming more critical

By Anne VanderMey

For Alex Cavallini, the financial crisis hit home as he was preparing to begin a job with Cummins Inc. (CMI) Less than 24 hours before he was set to fly out to his new office, the diesel engine manufacturer rescinded his offer, leaving the recent graduate jobless—even though just a few months before he had his pick of offers from two companies. "I felt like I was losing two jobs at once," he says.

So Cavallini turned to his school, which turned to Brian Hancock, a vice-president at Whirlpool whom Cavallini had worked for and impressed during his internship the summer before. As important as that good impression, Cavallini says, was that Hancock was a fellow alumnus of Brigham Young University. The alum sympathized with Cavallini's plight, and placed a call that afternoon to the CEO of a Whirlpool supplier. Company executives interviewed Cavallini within days and then offered him a job. He accepted, and in less than a week the 28-year-old went from being unemployed to being upwardly mobile.

The MBA alumni network is an integral part of the package at most business schools. Stories like Cavallini's, involving an alumnus making a crucial introduction or putting in a good word, were never uncommon, but they're becoming increasingly critical as companies tighten their belts and more traditional recruitment forums such as career fairs run dry.

An old saying, "It's not what you know, it's who you know," rings particularly true as recruiters are deluged with qualified applicants and seemingly flawless résumés get lost in the shuffle. But even absent a professional connection, schools are turning toward alumni as a source for fresh job offers, relying on the foundation of trust many school networks automatically confer. InCircle, an alumni networking site used at several U.S. schools, reflects a common sentiment with its revision of the old axiom: "It's not who you know," InCircle's slogan says, "it's how you know them."

Kevin Knox, director of the alumni association at Southern Methodist University's Cox School of Business, puts it even more directly: "The network has never been more important."
THE OLD COLLEGE TRY

The exact number of job offers that come through alumni contacts is hard to measure and varies from school to school. In a recent survey by the Graduate Management Admission Council, 28% of MBA graduates reported receiving their first job offer as a result of networking. Kristin Irish, deputy director of career development at the Yale School of Management, cautions that that number may be artificially low, as networks play such a fundamental role in the job search that their role is sometimes overlooked. At Notre Dame University's Mendoza College of Business, Patrick Perella, director of MBA career development, estimates that about 50% of students get a job through an alumni connection. Given the recent slump in recruiting, he says, "That number can only go up."

Perella isn't alone in his prediction. As the nation faces the highest unemployment levels in a quarter century, many schools are looking to offset decreases in recruiting with job leads from alumni. At the University of Pennsylvania's Wharton School, Director of Career Management Michelle Antonio says about 40% of offers come through formal, school-organized events like job fairs. This year, she said, that ratio could flip, with 60% of offers coming from other sources—primarily networking.

Across the country, schools are attempting to help that process along with appeals to alumni to come together in the wake of the financial crisis.

At Wharton, Dean Thomas Robertson sent a letter to all alumni seeking input, and career services will reach out to all alumni clubs—not a new tactic, Antonio said, "but it will clearly be more critical than ever this year."

At Notre Dame, career services recently finished a "phone-a-thon," contacting 150 MBA alumni working in sectors likely to receive stimulus funds, as well as the government itself. And at the University of California, Berkeley's Haas School of Business, Dean Richard Lyons penned an open letter asking alums to look "deep into your organizations" for jobs, signing off with the entreaty: "Hire Haas!" The letter, says Haas' Executive Director of Career Services Abby Scott, yielded 14 new job postings in just 24 hours.

"People like to be asked," says Dipak Jain, dean of Northwestern University's Kellogg School of Management. Kellogg has conducted a targeted outreach to alumni in certain fields, but hasn't yet sent out a mass mailing. The school, like many others, has also redoubled support for struggling alumni, and plans to offer more services to bring them back to campus, where they can both regroup and connect with current students. Says Jain: "We need them as much as they need us."
A TWO-WAY STREET

Alumni networking has its perks for employers as well. Given the dismal market for MBA hires, many recruiters find themselves with hundreds of résumés for just a few slots. For online applications, it can be even worse.

The logical next step is to limit the applicant search through networks "rather than getting a thousand applications from every average Joe out there," says Wharton's Antonio. It's easier for many employers to single out a few people who are qualified and come recommended, instead of opening the search more widely. "Of the opportunities that do exist, which are obviously fewer and farther between, a lot of those will never hit a job board," she says.

G.R. Christon, a senior director at crisis-management firm Alvarez & Marsal and a graduate of the Cox School of Business at Southern Methodist University, says he contacted his alma mater when his firm was set to take on new recruits simply because he knew they would have a list of qualified résumés ready for him. "Putting ads in the paper or on Monster.com is kind of inefficient for us," says Christon.

An added benefit to recruiters is a network's reliability, especially in an economic climate where making a hire is taking a gamble. "It does help lower the risk when you can use [your contacts] to check into what you're getting," says Greg Bolino, a partner at Accenture (ACN) and chairman of the University of Michigan's Ross School of Business's alumni board of governors. At the consulting firm Business Talent Group, Vice-President Michelle Cline, a graduate of the Stanford Graduate School of Business, says the firm regularly seeks out talent through alumni networks, and hires largely along those lines. Once she has the recommendation from a person whose judgment she trusts, "There's not much more that I need," she says.

Of course, almost without exception, employers caution that a diploma doesn't automatically confer connections. It's far more effective to build genuine relationships, and only later ask for a job.

Those who don't heed that rule are eyed suspiciously, employers say. It's better to start earlier, or just ask for career advice or an informational interview. In those cases, says Bolino: "It's easy for me to say yes because somebody said yes to me."

"A LITTLE BIT OF PANIC"

As for students, the writing is on the wall. Formerly casual networking events have become a little more tense—with more industry-related introductions and swapping of business cards. At the University of Chicago's Booth School of Business, Senior Alumni Affairs Director Tracey Pavlishin says she's seen more professional connections made at the school's alumni-student gatherings—which include such things as happy hours, wine tastings, and golf outings—even though that's rarely the core purpose of the events.

At the Thunderbird School of Global Management, Associate Vice-President of Career Services Kip Harrell says there's been about a 50% increase in the number of students asking for alumni contact information since last year—meaning more requests than ever. Harrell, who is also the director of the MBA Career Services Council, says he advises students to dress professionally every day on the off chance they run into someone on campus who might serve as a professional connection. He's made a point to call students when alumni visit him, saying: "Whatever you're doing, drop it and get over here to talk to Jim, or Tony, or whomever it may be."

"You see a little bit of panic on everybody's faces," said Mary Lousteau, a first-year MBA at the Robert H. Smith School of Business at the University of Maryland, who has been organizing events for students and alumni in the marketing sector. She has two potential leads on internships—both through her work setting up alumni events. "It's becoming more important as students realize the reality that some of those opportunities are filled up," she says.

Most students realize their networks will be more crucial this year than ever before and are preparing accordingly—whether it be joining the business networking site LinkedIn, perfecting their golf technique, or methodically mapping out extended networks on Excel spreadsheets. Lousteau said the internship search sometimes takes precedent even over her wedding planning.

Even though many MBAs obsess over their networks, it may not do them much good. In the wake of sweeping cross-sector layoffs, MBA alumni aren't always in a better position than students. "More people are going to look for alumni for those connections," Harrell said. "But whether they prove more fruitful than they have in the past remains to be seen."

Here, view a slide show of the schools with the most active alumni networks and a video describing the importance of alumni networks.

Anne VanderMey is a B-schools writer at BusinessWeek

Posted by: Louis Lavelle on March 26

With the economy in turmoil, many MBA graduates are finding the job search tough going. To give readers some insight into the strategies they’re pursuing and the difficulties they face, BusinessWeek has recruited four out-of-work MBAs to write about their experiences for a new feature called “The Hunt” that will appear periodically on the Getting In blog. Comments, as always, are welcome.

By Bryan Glover
I know many people are experiencing the same frustration I am, and I sincerely hope this blog can help relieve the feeling of “aloneness” that can permeate a job hunt. My bio has more information about who I am and my background, but I thought it appropriate to share with my audience a synopsis. I finished my MBA program in December and had been working part-time during my final semester at a company that had said my job would become full-time after I graduated. Unfortunately, I was notified on my graduation day that I was going to be laid-off.

I would describe myself as a driven, intelligent, hard-working generalist with a diverse background and experience at a number of world-class companies. My career goals may sound a bit vague and fuzzy for a 35 year-old MBA graduate, but they work for me. My overarching goal is to find a career that I enjoy and that is challenging. I can better tell you what kind of organization I want to work for than what position I want to have in the future.

My job hunt can best be described as a series of peaks and valleys up to this point. Almost weekly I will hear from a potential employer whether it be a phone interview or in-person. I have been offered jobs only to have the company run out of money the week I was supposed to start. I have had one company contact me to set-up and interview, delay the interview one week, then ultimately fill the opening with an internal candidate. I had another company e-mail me to set up a lunch meeting, which went well, and then follow it up with a phone call that I couldn’t answer because I was in a meeting, and that manager not bother to return my voicemails.

My job-hunting approach has been multi-faceted. I have been networking, attending job fairs, sending resumes through contacts, and using various online job sites. I am treating my job search like a full-time job. In general, I will pick a site or sector a day and dive in. For example, one day I spent researching and applying to jobs with the federal government, the next was with my state, and so on. I have had a few offers so far that were at salary levels so low that I could not pay my bills if I took them. So, for now I am turning those jobs down with the hope that I can find a job in my salary range before my bank account reaches a critical level.

Emotionally, this job hunt has been trying. I think much of this stems from seeing so many of my classmates unable to find jobs upon graduation. Of the 27 people I graduated with, only three have been able to find full-time employment. Of those three, only one has found a job in a field and at a level that would be considered MBA caliber. One has gone to work for a non-profit and teaching GMAT prep classes on the side; the other recently took a job as a waitress. I think much of this is due to the macro economy, but there does seem to be a stigma against MBAs that plays out in not getting interviews/offers or in the form of low salary offers.

Things change day-to-day. I go through mini depression cycles weekly. I don’t mind rejection and I have been through lay-offs and bubble bursts before (I worked at a dot com when the bubble burst in 2001), but to see so many widespread reports of economic problems, the struggles of my classmates, the overnight evaporation of jobs, and the “we can be as picky as we want and you will take what we give you” attitude on behalf of so many employers is really souring me on this whole process and my future prospects when the economy does turn for the better. I am trying to stay positive because I expect to have 30 years of career in front of me and starting out bitter and resentful isn’t going to help me be successful. I will admit that some days are harder than others. I know a number of people who have been laid off in the past six months (over 30 in my network alone) and this weighs on me. While I know I am highly qualified, I also know that companies can be (and are being) very picky in their hiring right now.

Thanks for reading and please feel free to share any thoughts, questions, or feedback as appropriate.

Business Week

President Obama recently unveiled plans to spur lending to small businesses. Experts detail the benefits and drawbacks of taking on debt

By Karen E. Klein

Over the past few weeks, President Obama has unveiled multiple plans for aid to small businesses, including lowering loan fees, increasing guarantees on government-backed loans, and buying up to $15 billion in Small Business Administration-backed loans. But will the new programs unfreeze credit as they are intended to do? And how can entrepreneurs take advantage of the warmer climate if they do?


Sanford Ehrlich, executive director of San Diego State University's Entrepreneurial Management Center, says the lending initiatives are likely to provide some relief, but he worries it won't be enough to help companies that are really struggling.

"Anything that will increase lending will be good for small business, but you have to be a fairly liquid small business to take advantage of this program. If you have too much inventory, too little cash flow, you're currently carrying debt that's been called, or balloon payments are staring you in the face, adding more debt to your current situation isn't going to help," Ehrlich says. "So many small businesses are in serious trouble that the number this will help will be limited."
Take Advantage of the Downturn

Ehrlich says he would have preferred to see government increase its spending in the SBA's Small Business Innovation Research or Small Business Technology Transfer programs. With the overall decline in wealth, he says, there's no longer much private investment money for the innovative, high-technology startups that often have an outsize impact on high-wage job growth.

If, however, small business owners can position themselves to take on new debt to fund future growth, Ehrlich says, they should begin looking for credit as the Obama plan goes into effect. "Companies currently in decent cash positions should consider plowing money back into their marketing and branding efforts, buying competitors, and accumulating more market share in this economy," he says.

But Ehrlich cautions entrepreneurs struggling to keep their heads above water not to think of loans as life preservers. "If your company is going under, do a realistic evaluation about whether you need to liquidate. Don't take on more debt just to keep treading water."
Time to Expand

Maria Minniti, a professor of entrepreneurship at Southern Methodist University's Cox School of Business, agrees. Companies in good financial situations are likely to benefit from increased access to credit under Obama's plans, particularly when combined with a market in which costs are down for human capital as well as commercial space. "This may be the time to upgrade your location or hire some fantastic talent," she says.

And would-be entrepreneurs with good credit scores might find this a good time to borrow some funds, she adds. "Small businesses, especially young ones, tend to operate on a tight budget, stretching earnings from year to year. If you've operated on a budget and you're holding some reserve, this may be the time to borrow and make improvements or expand."

Daniel Meyerov, a small business consultant and founder of OnlyBusiness.com, says companies looking for new credit should approach lenders by emphasizing the part they'll play in economic stimulus. "Banks won't want to lend to small businesses that are going to hold the money and try to survive through the wilderness," Meyerov says. "They will want to see it invested in the economy in a way that will support surrounding businesses in the supply chain."

Filling out Forms

A compelling loan application will include detailed plans for how you'll use the money—along with forecasts of results, he says. Also make sure your paperwork is completed properly before you deliver it to a lender.

"This is often an issue with small businesses, and it affects their credibility and accountability," says Meyerov. "If you're unsure and you fill out the paperwork wrong, it'll go into a very large pile marked 'more detail needed' that can sit on a desk for a very long time. Position yourself properly, have your documents ready, and if you're a viable business, you'll get access to capital sooner rather than later."

Demand for loans has dropped in 2009, according to the U.S. Treasury, perhaps because many companies are pulling back on spending or fear they wouldn't get a loan if they applied for one. But demand is likely to increase if banks feel more comfortable lending under the new government guarantees, says Minniti.
Drawbacks Nonetheless

While she commended the Obama Administration for putting a spotlight on small business, she says she is wary of the idea that government—not the free market—may play a greater role in determining which companies get loans. "Economists like myself tend to believe that the market incentive structure does the best job of selecting and channeling financial flow to the right places," she says.

Minniti worries that with higher loan guarantees and government providing a secondary market for small business loans, bankers will be tempted to abandon their strict monitoring role in lending. "In spite of their best intentions, the government's attempts to monitor and implement these programs correctly will add to a huge bureaucracy." she says. "Will a large government plan do a better job than the market would? It's tricky to work that out."

Dan Mica, chief executive of the Credit Union National Assn. and former U.S. Representative from Florida, agrees that creating a small business "lending bubble" would be a mistake. "You have to draw that line very carefully," he says, "but people who do lending for a living are very good at making the distinction between businesses that need extra help without being imprudent in their decisions."
Trying to Raise the Ceiling

Mica, whose organization represents the nation's 8,000 credit unions and their 90 million members, is working to get laws changed that cap credit unions' ability to lend to small companies. "Our credit unions are the best-capitalized financial institutions left in America, and we could put $10 billion into the economy almost immediately," he says.

Mica spoke to Obama adviser Valerie Jarrett, and his chief counsel spoke briefly to President Obama, at the small business press conference on Mar. 16, Mica says. Under current law, credit unions can use up to 12.25% of their total assets on small business loans. But most have reached that cap and would like to extend more loans to small businesses, where he says credit unions have default rates of less than 2%.

"We have a record of lending to small companies, and we know how to do it," Mica says, noting that Senator Charles Schumer (D-N.Y.) is planning legislation to raise the cap on credit union lending later this year.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Business Week

Though the SBA doesn't give stimulus package loans directly to small businesses, savvy scammers would have you believe otherwise

By Karen E. Klein

Q: My sons own and operate an architectural/engineering firm and a steel fabrication firm. These are Main Street firms, needing operating capital. What department of the stimulus package do they apply to for a loan?

—J.R., posted online

A: The American Recovery & Reinvestment Act (also known as the "stimulus package") signed into law last month provides $730 million to beef up the loan guarantee programs of the U.S. Small Business Administration. Part of that sum is supposed to reduce the fees that borrowers pay for SBA-backed loans and to increase government guarantees on the loans, making them more attractive for bankers. These measures are designed to help thaw the current credit freeze.


Another program in the works, a joint Fed and Treasury program known as the Term Asset-Backed Securities Loan Facility, or TALF, also aims to get credit flowing again to Main Street borrowers.

However, it is important for your sons and other small business owners to realize the government does not give loans directly to small businesses. The government works through commercial lenders, such as banks, by guaranteeing the small business loans of banks that participate in their loan programs.

The confusion on this point has unfortunately opened the door to fraudulent operators who charge fees purporting to help small business owners and individuals get government money, says Alison Southwick, spokesperson for the Council of Better Business Bureaus in Arlington, Va. "Anytime there's a story dominating the headlines, scammers are going to take advantage of it," she says. "When people hear the word 'stimulus,' they know that's something they heard about in the news, so it must be legitimate."

Hundreds of complaints have poured in to the BBB in the weeks since the stimulus package was passed, she says, most of them from people who responded to Internet ads leading to Web sites featuring "testimonials" from individuals claiming they got government money to start businesses or pay off bills. For a fee, many of the Web site pitches say, they'll send you a CD or a mail-order kit explaining how to have access to government stimulus money.
Lucky Winners?

These Web sites are extremely misleading, Southwick says, including some that incorporate blogs that appear to be written by the lucky winners of all that stimulus cash. However, not only is the government not cutting checks to would-be entrepreneurs, you don't need to pay for information about SBA loans or government grants (most of which are available only to nonprofit organizations or very specialized research companies).

"They're charging you for free information, in the first place. And maybe they send you a CD or maybe they don't. But what happens is that people's credit cards start getting billed and there's no way to stop it," she says. "A woman I talked to today said she started getting billed not only for the stimulus information but also $25 per month for a newsletter she didn't want, either."

Victims often wind up paying $60 to $80 a month, and if they don't realize it, the scam can go on indefinitely. "They keep on billing and hope that a certain percentage of people aren't going over their credit-card statements closely," Southwick says. Even those who catch the unwanted charges often find there's no way to stop the billing unless they cancel their credit cards.

The bottom line: Provisions of the stimulus package and other government programs are aimed at increasing access to government small business loans and getting the banks back in the business of loaning money again. Good information about SBA loan guarantee programs is available here. Other government sites offer free information about grants, student aid, and government benefits.

There is no reason to pay for software or guides to apply for government loans or grants. Companies that offer such information for a fee—when it is already available for free online—are likely to be scams, so stay away from them.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.
Business Week

Faisal Chaniago , Contributor , Jakarta

Life is like a wheel that turns round and round until one's destination is reached.

It is most important not to stop and to feel satisfied when one attains success, because around you there are still many people who need your help.

That is why you have to be unselfish. Budiyanto Darmastono believes in this philosophy and he credits his success as an entrepreneur to this philosophy.


Budi, as he is called, is in the courier and cargo business. His company, PT Nusantara Card Semesta (NCS), is considered one of the largest players in the city courier business. His company has a good reputation with major banks, because banks like BCA, HSBC, ABN Amro, Standard Chartered, Bank Mandiri, Bank Niaga, Bank Permata, GE Finance, Bank Bukopin, Bank Bumiputra and Bank Danamon frequently use his services.

Apart from banks, major insurance companies are also his clients, such as Manulife, Sequislife, Prudential, Axa Mandiri and AIG Lippo. Other clients include Sharp Indonesia, Macindo, Garuda Indonesia, Coca-Cola, Makro, Abbot, Olympus and Datascrip. In total, his clients number about 300 large companies.

Before becoming a successful businessman, he worked for Diners Club for 15 years. After such a long time he felt that his career was going nowhere, so Budi, who was born in Karanganyar, Central Java, in 1961, established his own courier company.

"If I had stayed on as an employee, there would not have been any major changes in my life and I would have had to depend on my salary there as my only income," he said smiling.

He once tried to open a mini market and all the time he dreamed about becoming a wealthy man and living a comfortable life.

Finally at the end of 1996, he decided to leave his job at Diners Club and established NCS, hoping it would grow into a big company. At first his wife, Reni Sitawati Siregar, did not agree with his decision.

She was afraid of him losing a regular income, while a new venture was not a certainty. However, Budi persisted.

To avoid any tension with his wife, he brought her around to his way of thinking. He told her that once he could fully focus on the business it would have a huge potential. Initially, he collected as much data as possible and made a database containing details about all his potential clients so that the company's operations would be efficient and effective.

He had learned from his experience at Diners Club that information technology helped a lot. When he established his company, especially during the early years, very few other courier companies used IT in their operations as the work was mostly manual then.

It was hard to answer clients' questions about the whereabouts of their goods as they had to look through manually recorded data. Only giant-sized companies used IT for their business, such as DHL and TN T.

When he established NCS, his starting capital was just Rp 50 million and he had only eight employees at a rented 200-square-meter house on Jl. Tali, West Jakarta. Budi said it took him about a month to get the business permits and get the office organized.

But that was then. Today, NCS has its own five-story building in Slipi, West Jakarta. From the initial eight employees, the company currently has about 2,600 employees and 27 branches in major cities, such as Greater Jakarta (including Bogor, Bekasi, Tangerang, Depok) Bandung, Padang, Medan, Palembang, Yogyakarta, Surakarta, Manado, Gorontalo, Banda Aceh, Surabaya and many more.

NCS has spread its wings even farther by opening a branch in Singapore."NCS is no longer a domestic courier company, but much more as it handles international air and sea cargo, moving, trucking, warehousing, logistics and distribution," Budi explained.

His choice of courier and cargo business was related to his previous job in the finance department of Diner's Club where he had firsthand knowledge of the business.

At that time, Diners Club used to send a very large amount of cards and letters to its customers. After observing how few courier companies there were in the country, Budi, who graduated from the School of Accountancy at Gadjah Mada University, Yogyakarta, got the idea of opening a courier company.

"The number of such companies at that time was still small and they were not that professional in their business. So I said to myself that here was an opportunity to open up a courier company," he said. Feeling confident, he started the business and determinedly competed with established players.

In the beginning, he wanted to focus on the card center business, so it is not surprising that his very first clients were banks. His wife was the operations manager of the company in the early years of the company, while he still initially worked for Diners Club.

However, he was directly involved in the marketing side. He did all the company's presentations when introducing its services to potential clients.

He did all this in his spare time, but he did his best so that his employers could not find fault with his performance and realize that he was working elsewhere.

However, today the situation is different. He does not have to hide his business from anyone and can develop his business further. The father of one admits that it has not been an easy job developing the company into a big entity.

Budi said there were a number of strategic keys to the success of NCS. First, one has to be optimistic and determined.

"As an entrepreneur, I have to be confident of what I am doing and of my capability. Obstacles are only natural in any venture," said Budi, who loves reading.

Second, establish commitments to build trust on the part of customers and clients.

Third, use the right technology. To satisfy his clients, Budi keeps developing his infrastructure by upgrading the company's IT system. He has spent more than Rp 2 billion on the company's hardware, software and consultant's fees.

With the latest IT system, NCS can always report or track the whereabouts of customers' goods and consignments at any time.

As a leader, he never treats his employees as subordinates, but more like partners. He realizes that his success is inseparable from the role and hard work of his employees. This is why they like working for him and many stay for years.

Before turning into an entrepreneur, he dreamed that one day when he became successful he would stand by their side and treat them like friends.

"That was my dream then. Now, every year I go on the haj pilgrimage or umroh and in front of the ka'bah I always pray that I can send these friends of mine on the haj pilgrimage or umroh. And my prayers have been granted. Before sending them to Mecca, I took my family, including my wife's family, on the haj pilgrimage," he concluded.

Background

Name: Budiyanto Darmastono

Place/date of birth: Karanganyar, Central Java, April 5, 1961

Status: Married

Education

1990: Accountancy, Gadjah Mada University

Experience

President director, PT Nusantara Card Semesta

Jakarta Post

The SBA's forthcoming loan-relief program can't be used to pay down existing SBA loans -- but past borrowers will still be eligible for help with other debts.

NEW YORK (CNNMoney.com) -- The Small Business Administration is still drawing up guidelines for its forthcoming emergency loans program, a stopgap measure intended to shore up small businesses struggling to keep up with payments on existing debt. But the agency this week confirmed an unexpected twist: Businesses with current loans backed by the SBA won't be able to use the new loans to cover payments on their existing SBA debt.

The upcoming program, tentatively dubbed the "America's Recovery Capital" (ARC) loan program, is a measure mandated by last month's stimulus bill. The bill requires the SBA to create a new "business stabilization" program to back loans of up to $35,000 to small businesses "experiencing immediate financial hardship." The loans are intended to be used to make interest and principal payments on a "qualifying small business loan" for up to six months.

In several announcements this week, SBA officials said that SBA-backed loans made before the stimulus bill's passage on Feb. 17 won't be eligible for ARC loan relief. The reason: The American Recovery and Reinvestment Act, the stimulus bill, forbids it. A provision Congress wrote into the bill explicitly prevents the new stabilization loans from being used to pay down SBA-backed loans made before the bill's enactment.

A staffer with the House Small Business Committee said that restriction was mandated by the Congressional Budget Office to comply with pay-as-you-go prohibitions against increasing the federal deficit through new direct-spending measures.

Still, both the House Committee and the SBA emphasized that businesses with existing SBA-backed loans can still apply for the new ARC loans. The only catch is that they'll have to use their new loans to pay down debt other than their SBA loan.

"Private loans made for any legitimate business purpose -- including credit card debts, bank loans and real-estate loans -- would be eligible for the program," the House Committee staffer said. "The Committee is also pushing the SBA to work with borrowers on loan modification and forbearance to provide relief to small business borrowers who have SBA-backed loans."
Talk back: Have you had trouble getting a loan?

The new ARC loans will be offered on extremely compelling terms for both business owners and lenders. The loans will come directly from banks, but the SBA will offer the banks a 100% guarantee on the loans -- something the agency has never done before. If the business owner defaults, the SBA will repay the bank for the full value of the loan.

The SBA will also fully subsidize the interest on the loans, making them essentially cost free for business owners. No payment on the loans will be due for a year, and businesses will have up to 5 years to fully repay them.

The SBA is still creating the guidelines for the new ARC loans program and doesn't yet know when the funds will be available.

"The details have not been worked out yet," SBA spokesman Michael Stamler said earlier this week. "It a very complex undertaking, but we are hurrying as fast as we can, consistent with making sure we have a thoughtful, effective program in place."

Congress allocated $255 million in the stimulus bill to fund the ARC program. That money will be used to pay for the program's loan guarantees and interest subsidies, so the actual lending volume it will support will be higher. The SBA is still working out the formulas to calculate how far the ARC funding will stretch.

It's also still determining what businesses will qualify for aid. The ARC loans will come directly from banks, and in a Web presentation this week, an SBA official said that only "viable" small businesses will be eligible.

That's an important caveat for a program that offers banks complete immunity against loans going bad. The SBA is already trying to cope with soaring default rates for its traditional loan programs, which only ensure banks against losses on a portion of their losses on qualified small business loans.

"A 'viable' small business is a business that has a demonstrated earnings history and proven record for success that may just need a little extra help to get through a short-term downturn," Eric Zarnikow, the SBA's associate administrator for capital access, said during the presentation. "We will be issuing additional guidance to lenders when the ARC program is released."

While many aspects of the program remain nebulous, small business advocates say it can't arrive soon enough.

"This stimulus, while small, will clearly help many existing small business borrowers to weather the storm," said Edward Tuvin, a former SBA lender who is now managing director of factoring firm Creative Capital Associates in Silver Spring, Md.

"It sounds like a good plan, but where is it, and why is it so difficult to put it into action?" asked Martin, the owner of Nu Wray Inn, a bed & breakfast in Burnsville, N.C.

Martin, who asked not to have his last name used because he's currently consulting part-time for a bank, has been hit hard by rising operating costs at the same time as sales dry up. To buy Nu Wray Inn three years ago, he took out a private bank loan, one not backed by the SBA. That loan is currently at a 10% interest rate, and the bank has turned down Martin's requests for a modification.

"I'm taking money from my other job to make those payments. If it wasn't for that, my business would be bankrupt," Martin said.

The SBA's ARC program could help his business -- if it gets moving in time.

"It frustrates me a lot to see banks and auto makers and these other companies getting a quick response, and small business as a whole getting a very slow response," he said. "The inn I run has been operating since 1833. If I go out of business, that's a hardship to my local community. I'm right in the middle of the town square." To top of page
First Published: March 20, 2009: 1:59 PM ET

CNN

From The Economist print edition
Lending to the poor has held up well but it is not as safe from the credit crisis as its champions hoped

A GLOBAL credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. “We have not been touched in any way by the financial crisis,” he said on a recent visit to Japan. “The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.”


He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and “jingle mail”; delinquency rates are microscopic.

Some MFIs, however, do not enjoy the same isolation that their borrowers do. Many of them are funded internationally. According to the Consultative Group to Assist the Poor (CGAP), a research centre in Washington, DC, foreign-capital flows into microfinance tripled between 2004 and 2006. About half the industry’s funding comes from aid budgets, but the share of private money is growing. The World Bank’s private arm, the International Finance Corporation (IFC) gave 55% more each year to microfinance lenders between 2004 and 2007. MFIs, especially those in eastern Europe and Central Asia, also borrowed from foreign banks. Meanwhile the microfinance portfolios of private investment funds grew from $600m in 2004 to $2 billion in 2006.

Funding from development institutions like the IFC is likely to be stable, but aid budgets are being cut and other sources of funding are threatened, too. Kimanthi Mutua, who runs K-Rep Bank, a big Kenyan microlender, says that in 2007 he fielded calls from prospective investors every couple of weeks. For the past six months he has not had a single call. According to CGAP’s Elizabeth Littlefield, borrowing costs have risen by up to four and a half percentage points in some markets. Foreign-currency borrowers may have exchange-rate fluctuations to cope with. And some global banks are pulling out altogether. Even MFIs that borrow locally may find their banks’ funding is constrained by global conditions.

An even more pressing concern is refinancing existing debt. Most MFIs have loans with one- or two-year tenures. According to the IFC, there is a potential refinancing gap of $1.8 billion over the next 18 months. The IFC and the German government have put together a $500m fund to help microfinance firms with refinancing.

All this, some experts argue, should encourage the institutions to start raising funds by collecting deposits rather than relying on fickle markets or donors. In Africa many MFIs already do this. The slow slog of attracting depositors can be off-putting, however, and may become harder if the crisis deepens. The World Bank estimates that worsening economic conditions could push an additional 65m people under the $2-a-day poverty line. These people—formerly known as the “nearly poor”—were just the sort whose savings deposit-taking MFIs had hoped to target.

The squeeze on credit could expose additional frailties in the microfinance model. Many observers suspect that at least some microfinance loans actually finance consumption, not investment, and that borrowers use new loans from one MFI to pay off their debts with another. As long as new credit is readily available, this strategy works—much as paying off one credit card with another once did in the rich world. But the credit crunch may expose this as a problem, reckons Justin Oliver, who runs the Centre for Microfinance, a research centre in Chennai, India. Meanwhile, the IFC reports that data from the top 150 microfinance institutions show that the share of borrowers 30 days delinquent on their loans has increased from 1.2% before the crisis to between 2% and 3% now. This is still very low by most standards and Mr Yunus says that repayment rates at Grameen remain impeccable. But the worry is that a prolonged credit crunch could make microfinance clients start to look more like those hapless subprime borrowers.

Economist.com