Business microloans.

Kenneth Proudfoot believes in peer pressure. The program coordinator for Elmwood Neighborhood Housing Services (ENHS) in Providence, R.I., Proudfoot works with a peer group microloan program. Its goal is to teach budding entrepreneurs basic business skills and to provide small loans from $500 to $2,000. The repayment term is one year.

So far, the three-year-old ENHS has loaned $20,000 to microenterprises from a revolving loan account, The program is sponsored by community groups, including Inter-Faith Housing Corp., Elmwood Neighborhood Housing Services, St. John's Cathedral, Citizens Bank and Rhode Island Hospital Trust National Bank.

ENHS is one of some 100 microlenders accredited by the Small Business Administration. Since 1992, the SBA has funded a network of microloan centers nationwide. Local groups such as churches, small community banks or credit unions apply to the SBA asking to serve as intermediary lenders or microloan centers. In turn, the SBA funds these groups up to $750,000.

The SBA charges the intermediary lender interest based on the five-year U.S. Treasury bond rate, which has been hovering around 5%. The intermediary lender is allowed to charge loan recipients an average interest rate of 10%.

Mike Stamler, an SBA spokesman, says that intermediary lenders can charge up to 7.75% over the Treasury rate for loans greater than $7,500. For loans less than or equal to that amount, the intermediary lender can charge 8.5% over this rate.

"We show our members that they don't need several thousand dollars to open a successful business," says Frank Ballesteros, executive director of PPEP MICRO Industry Credit Rural Organization in Tucson, Ariz. "Microloans enable most of them just to buy inventory, which can be a great start." To date, PPEP, a nine-year-old micro-loan small business center, has doled out $1.93 million to 526 clients through-out the state.

Ballesteros says that for some business owners, microloans introduce the process of getting credit.

After going through the microloan process, Ballesteros says his clients are in a better position to hit up the big commercial banks, like Bank One Arizona, which has already committed to providing expansion capital to microenterprises.

Though there aren't any concrete numbers on the repayment rate for microloans, lenders anticipate a default rate of 5% in rural areas and slightly higher in inner cities. An overall estimated 95% repayment rate at 10% interest makes these microcenters more than generous, as lending institutions go,

Rural and urban communities have untapped needs that businesses can cater to, says Proudfoot. "With just a few dollars, our loan recipients can build lucrative businesses."