Karla Hertzog, president and CEO of Innovative Employee Solutions and a board member of Acción San Diego, says several hundred companies are up and running today because of the work of the nonprofit agency. (photo/alandeckerphoto.com)

When Acción San Diego opened in 1994 with a mission of lending money to cash-starved entrepreneurs, the nonprofit agency had a lot in common with its clients — the staff and volunteer board were learning the ins and outs of micro-lending while struggling to raise funds and pay their bills. Acción’s first board chairman, Bill Roper, recalls how tough it was to launch the program. “We were very hand-to-mouth,” he says, with board members digging into their own pockets to make payroll. “There were no successful models out there for us to copy. We were on our own, plowing new ground,” says Roper, executive vice president with San Diego-based Science Applications International Corp.

Ten years and more than 1,600 loans later, Acción has made its mark on San Diego’s small business scene. The nonprofit micro-lender has made $6.9 million worth of loans averaging $4,178, and has $1.3 million “on the street,” says founding board member William Lynch, a businessman and philanthropist.

“That’s a lot of lives to affect for one little organization that started with $25,000 in equity,” says Lynch. “It’s extraordinary by any measure.”

Karla Hertzog, chief executive and chair of Innovative Employee Solutions and an Acción board member, says, “There are several hundred companies that are up and running today that wouldn’t be if it weren’t for Acción.”

Patti Mason, president and CEO of Acción San Diego, credits the organization’s attention to detail and fiscal discipline for its success, noting that donors such as banks, foundations and government agencies would be reluctant to support a nonprofit that didn’t have its own financial house in order. And without such partners, she said, Acción couldn’t carry out its mission.

“These are loans, not grants,” says Mason of the cash disbursed by Acción to the Bill Gateses and Mary Kays of tomorrow. “It is a business. We do a lot of good but I have to run it like a business or we won’t have any money to help anybody. I consider it running a business with compassion.”

Businessman and philanthropist William Lynch, a founding board member of Acción San Diego, says the agency has made $6.9 million in loans averaging $4,178 and has $1.3 million ‘on the street.’

The San Diego nonprofit is modeled after Acción International, which was started in 1961 to help impoverished people in Latin America improve their standard of living by helping them start small businesses. The concept has since been successfully expanded to other parts of the world, including Africa and the United States. Local Acción agencies, such as the one in San Diego, are licensed by the parent organization, but run by their own independent boards.

The agency’s five staff members work from an office in the World Trade Center building on Sixth Avenue in Downtown San Diego. Acción San Diego’s annual operating budget is about $500,000, with about half the money coming from the interest and fees generated by loans, and the rest supported by its fund-raising efforts, Mason says.

Acción San Diego targets micro-enterprises — defined as family-run businesses with five or fewer employees — particularly those run by minorities, women and people with low to moderate incomes. Most who apply for Acción loans wouldn’t qualify for a bank loan for such reasons as lack of financial records or a spotty or nonexistent credit history. Many of Acción’s clients also have a language barrier and a mistrust of banks, says Mason.

Along with improving the income and self esteem of its clients, Acción wants to help them become “bankable,” meaning they can qualify for a bank loan that is usually at a lower interest rate than Acción can offer.

Two examples are Debbie Santos and Pablo Perez, who both started businesses on a shoestring, and gradually expanded with the help of Acción loans. The two entrepreneurs followed what has become a typical pattern for Acción — by obtaining loans, paying them off on time, and coming back for new loans (at progressively lower interest rates). Santos, who runs a deli and market in the Gaslamp Quarter, was the first client to get a $35,000 loan when Acción raised its loan limit. Perez, who runs a wholesale candy import business in Chula Vista, has had four Acción loans, the first in 1996 and the most recent in 2003, reports Mayte Flores, general manager of Perez’ company, Candy el Pecas.

Flores says her boss was a salesman for another candy company when he decided to go into business for himself. He began buying candy in Los Angeles, packed it by hand and put on labels, and started selling to small markets in San Diego. At the time, he was operating from a 380-square-foot warehouse. His got his first Acción loan of $2,500 when he needed to buy display racks that his customers could use to show off his candy in their stores.

Today, the company has an 8,000-square-foot warehouse in Chula Vista, 13 employees and sells to 350 stores, and has sales reps in Los Angeles, Las Vegas, Texas, Arizona, Calexico and Maryland, says Flores.

Early on, Flores says, Perez tried to get bank loans but was unable to qualify. That’s when he turned to Acción.

“The only one who was able to help (our business) was Acción. And not only once, but two or three times. It’s really hard to get a loan from a bank. The easy way to get it is from Acción,” she says. “He (Perez) started with a really small idea and now it’s growing, thanks to Acción.”

The next step in Candy El Pecas’ growth, says Flores, is to seek a bank loan to buy a machine that can weigh, package and label the candy much more quickly. The machines the company has looked at range from $35,000 to $185,000, and Flores says they are working with the U.S. Small Business Administration to get their first bank loan.

Debbie Santos, who raised three children as a single parent while building her business, the Cine Café on K Street, also is seeking her first bank loan. When she took over the café in 1996, she was bringing in about $50 a day because foot traffic was scarce.

“That was when I was really poor, no sales, no people,” Santos says. She built up the business by stocking items that customers requested, whether it was coffee and pastries, cigarettes or condoms, she says, often going to a nearby gas station to buy a few packs of cigarettes at a time. With the addition of a Hilton hotel across the street, and new condo buildings that have come on line in recent years, the business is thriving, Santos says. She has expanded into the space next to her café, where she opened a business center with shipping services and Internet access, and is taking over another adjacent storefront to enlarge the market and deli.

She has stuck with Acción over the years even when she could have qualified for bank loans, says Santos, because she has high regard for Mason and her staff and their ability to turn a loan around quickly. “They’ll help you and really work to get that loan,” says Santos.

Now that her business has grown — Santos’ portfolio includes a cinnamon roll shop in Mission Beach and ATM machines — she is ready to seek financing from a bank. Her goals include working as a consultant for struggling entrepreneurs, and finding a husband. “If I had somebody, I wouldn’t be working as hard,” she says with a laugh.

Acción’s clients come from a wide range of backgrounds. The agency has financed businesses ranging from day care centers and tax services, to carpet cleaners, massage therapists and carpenters. Maria Montaño, one of Acción’s two full-time loan officers, says one of her clients was a woman who supported her seven children by selling tamales that she made in her home. She received several Acción loans, which allowed her to buy a delivery vehicle, and a vending cart she used to sell her tamales outside of local markets. “I know all my clients’ life stories,” Montaño says. “It’s a very close relationship that we have with them.”

Acción makes loans ranging from $300 to $35,000. Its first loan in December 1994 went to a group of four women who designed and sold ethnic clothing, hats, healing oil and art. The $3,000 loan was needed to pay for fabric, machinery, a cutting table and supplies, according to the application, and was repaid in full.

Over the years, Acción has refined its methods for screening applicants and deciding who should get a loan, Mason says. Applicants must have been in business at least six months, have no bankruptcies in the past six months, and no outstanding liens with the IRS.

During weekly loan meetings, the Acción staff reviews the applicants’ credit and banking histories, their income and expenses, and how the loan would be used. The purpose, says Mason, is to gauge whether the applicant can repay the loan.

At a recent meeting, the staff pored over applications from the owners of a music school in Fallbrook and a yoga studio and juice bar in Rancho Bernardo. After a review of the music school owner’s application, the committee approved his request for a $5,000 loan. A decision was delayed on the second application because Mason wanted more information about the applicant’s banking history.

Once the application is approved, Acción quickly cuts a check. “We can turn a loan around easily in five days if the client has the information ready,” Mason says.

While Acción’s main business is making loans, the agency also offers training to small business owners in such areas as finance, bookkeeping and creating a business plan. Even if the applicant knows his or her business, they may lack the financial skills to run the business properly, which can lead to loan defaults. One of Acción’s goals, says Mason, is to beef up training opportunities for clients.

Acción’s flexibility distinguishes it from other financial institutions. Depending on the circumstances, Acción can make exceptions to its lending guidelines. “Some of it is just a gut feeling you get from looking at it all. Then it comes down to, sometimes, a character loan,” says Mason. “They can be right on the fence but we believe in them.”

The nonprofit lender also works with clients who are having problems making loan payments, allowing them to make partial payments, or even no payments for up to three months, until they get back on track.

At 10 to 16 percent, Acción’s interest rates are generally higher than those offered by banks, but lower than credit cards. Current commercial loan rates at San Diego County banks are in the 5 percent to 8 percent range, depending on the size of the loan.

Art Rivera, vice president of community external affairs for Washington Mutual in San Diego, center, meets with Bobbie Oudinarith, regional business banking representative for the bank, and Ben Pruett, CRA business development specialist. (photo/Maya Ellman)

Art Rivera, vice president for community and external affairs for Washington Mutual Bank and an Acción board member, says Acción must work on letting micro-business owners know what it has to offer, from its loans to technical support and assistance. While its loan rates are higher than banks, he says, Acción provides a “quality product” and not everyone qualifies for its loans. To the extent possible, Rivera says, “They want to ensure that you’re going to be a success.”

Acción’s loss and delinquency rates — the loans that are written off or behind in payments — both run about 5 percent annually. Although significantly higher than a bank’s loss and delinquency rates, the numbers are considered good for a micro-lender. “We’re delighted with it,” says SAIC’s Bill Roper of the loss rate. “That’s world-class, that’s as good as it gets in this business.”

Acción uses those figures to approach potential donors, who provide the funding for loans and operations. Most of the money comes from banks, either in the form of grants or low-interest loans, but Acción also receives foundation grants and money from the city of San Diego through its Community Development Block Grant and tourism funds, says Mason. This year, Comerica Bank gave Acción a $250,000 grant for its loan fund, and one of its executives, Don Kincey, will soon join the board. “We’ve got a great staff, great partners and we’ve got a good track record, a demonstrated record of success,” says Roper.

Carol Wallace, president and CEO of the San Diego Convention Center Corp. and Acción’s board chair, says the agency’s license allows it to make loans throughout California.

With a full decade of experience under its belt, Acción is looking to expand its operations. Last year, the agency opened a satellite office in Orange County, and is working on plans to hire a loan officer who will be stationed in North San Diego County. Eventually, says Mason, she envisions Acción covering a good slice of Southern California, adding Riverside and San Bernardino to its territory.

Carol Wallace, who took over this year as Acción’s board chair, says the nonprofit’s license allows it to make loans throughout California. “I’d like to see us use that base to broaden our focus to include Southern California, and ultimately the entire state,” says Wallace, president and CEO of the San Diego Convention Center Corp.

The need for Acción’s services is tremendous, says Wallace, but not enough people know about it. The group needs to “take our light out from under a bushel,” she says. “You have a number of people living in San Diego that have tremendous potential as entrepreneurs, but they may not have the financial wherewithal to make that happen. Acción, by investing in them, allows them to become taxpaying citizens of San Diego.” Or, as board member Karla Hertzog puts it, “We’re kind of dream makers. We help people make their dreams come true.”