By: Jesse Golland Issue: Resource Management Section: Business
Funding for America’s Backbone
In May 2011, during National Small Business Week, President Barack Obama recognized small businesses as the “backbone of America’s economy.” According to the U.S. Small Business Administration (SBA), small businesses provide just over 50 percent of private sector employment.
Small business owners these days have plenty of concerns. Will there be demand for their products in a sluggish economy? Can they afford insurance for their employees? And most importantly, where are they going to find the funding to weather slow periods, support their growth, or help them get started? The SBA’s 2011 fiscal year recently ended September 30th, and they had a record lending year. According to the New York Times, the agency supported $30.5 billion worth of small business borrowing in 2011, up 35 percent from 2010.
However, there are a few concerning trends that accompanied this increase in small business lending. The number of 7(a) loans (a popular SBA loan program that can be used by small businesses to finance a variety of general business purposes) of $150,000 or less fell by about 13 percent, and the average traditional 7(a) loan nearly doubled to $624,000. It’s reassuring to know that more and more small businesses are getting the financial assistance they need. Yet, the average size of traditional 7(a) loans may overwhelm the financial needs and repayment capacity of the typical mom-and-pop stores. Many neighborhood businesses like laundromats, hardware stores or barber shops need smaller loans to manageably operate and grow. What about the landscaping business that needs $10,000 for equipment? Who is going to lend to the stay-at-home mom looking for $2,000 to sell concessions near her house? Or the flea market vendor who only needs $500 for more inventory? Who is serving these entrepreneurs?
The concept of microfinance, or the provision of small loans to the unbanked or under-banked, gained prominence in the 1970s when Muhammad Yunus, future Nobel Peace Prize winner, promoted the use of micro loans to pull families out of poverty in Bangladesh. On the other side of the globe, ACCION International, a nonprofit microfinance organization, was experiencing success in its microlending efforts in Latin America.
In the early 1990s, concerned about growing inequality and unemployment at home, ACCION International decided to bring its model back to the U.S. After a successful pilot project in Brooklyn, ACCION International helped establish a network of five organizations in the mid-1990s that today is the largest microfinance network in the U.S., providing loans nationwide through over 20 field offices and an online lending platform. The lending model was similar, and at the same time, quite different from the international model. Lending in Latin America was primarily to rural women entrepreneurs. Traditionally, in international microfinance, a group-lending approach was used where social pressure would encourage repayment and help mitigate for a common lack of collateral among borrowers. Loan sizes were often no more than a few hundred dollars or less.
Microlending in the U.S. has evolved to reflect the unique realities of American business owners. The dollar amounts required to open, operate and expand microenterprises and small businesses are typically larger in the U.S. Most American entrepreneurs have some form of collateral. Credit scores are easily accessible. Credit cards applications get mailed in bulk to many Americans, even those with low credit scores or troubled borrowing histories. The ACCION U.S. Network and other domestic microlenders have adapted the international model to a system that is working well and on an increasingly large scale in the United States.
Access to Capital
So, how does the ACCION U.S. Network differ from traditional financial institutions such as banks? Members of the ACCION U.S. Network are nonprofit organizations that have the ability to tailor their underwriting criteria to meet the needs of many entrepreneurs and small business owners who do not typically qualify for traditional business credit. These organizations provide credit to small businesses along with financial education and training. While ACCION New Mexico, Arizona, and Colorado’s loans range anywhere from $200 to $300,000, the average loan is approximately $6,500. Domestic microlenders typically differ from traditional financial institutions by displaying flexibility in the following ways:
Working with Lower Credit Scores: If a person’s personal credit score is below 650, it can be difficult to obtain credit from traditional financial institutions. ACCION New Mexico, Arizona, and Colorado can work with credit scores of 500 and up. The organization can even provide loans to individuals with no credit score or with just an Individual Taxpayer Identification Number. Does this mean that an applicant with a 500 FICO score can receive a $300,000 loan? No. They likely will not receive a loan larger than a few thousand dollars. However, this loan offers these individuals the opportunity to start building their credit, establish a relationship with a lender and get some initial working capital for their business. For business owners who have taken a financial hit due to unprecedented economic turmoil, these small loans offer a chance to rebuild.
A 2009 FDIC survey found that 25 percent of U.S. households are unbanked or under-banked. That same study found that minorities are more likely to be unbanked, with African-American households coming in at 21.7 percent and Hispanic households coming in at 19.3 percent. Under-banked and unbanked clientele can use domestic microlending programs to build their credit and become familiar with the lending process.
Start-ups: While every bank has different lending policies, many banks require two years of operating experience or an established banking relationship before they will consider lending to a business. While members of the ACCION U.S. Network differ in the start-up loans they offer, 36 percent of the loans ACCION New Mexico, Arizona, and Colorado issued in 2010 went to start-up businesses. Collateral: Collateral is an essential component of most loan applications. As a sign of a borrower’s commitment to repayment, collateral can be especially important for microlenders working with start-up businesses or entrepreneurs with credit scores lower than a bank would require. Reflecting the flexibility of many microlenders, the items pledged as collateral can oftentimes have more symbolic or practical value than liquid value. In its 17 year history, ACCION New Mexico, Arizona, and Colorado have accepted horses, an exotic snake collection and a saxophone as collateral! Lena Carris was an Emmy award-winning documentary filmmaker in New Mexico who needed a little capital to complete a project. She was reluctant to offer anything ACCION usually accepted as collateral, such as a vehicle or equipment. However, she did have something of deep value to her, a traditional Navajo dress woven by her mother. While it was difficult to assign a monetary value to the dress, Lena’s ACCION loan officer knew the pledging of the dress meant Lena was completely committed to repaying her loan.
Financial Education and Business Development Training: The ACCION U.S. Network offers additional services to its clients to help foster business and personal success, often at low- to no-cost. These services can include mentorship programs, educational workshops and free marketing opportunities. But more than anything, ACCION loan officers serve as an open ear to their clients’ concerns or questions. They’ll take time to listen to their clients’ issues and connect them with the appropriate community partners who can help solve their issues.
Seven years ago, Jennifer Brown was selling homemade soaps with loofah sponges at fairs and festivals. One day, she decided to sell soap with a rubber duck in it. After numerous customers inquired where they could buy just the duck, a light bulb went off. Jennifer and her husband Steve began traveling around the state of Colorado in a bright yellow vehicle with thousands of rubber ducks. In 2008, they decided they wanted to open a rubber duck store in Denver, Colorado. Brown, a former hedge fund manager and Kudron, who ran sales teams at a media group’s newspaper, were no slouches when it came to business know-how. However, they found it difficult to obtain financing to open their store. ACCION New Mexico, Arizona, and Colorado provided them with a loan which helped them open their store and increase inventory.
Since 2008, Quacker Gift Shop has gone on to achieve over $1,000,000 in sales, and the couple has opened their second store in Manitou Springs, Colorado. They have been featured in CNN Money and have provided ducks to be used in a movie. The store sells ducks of the president, pirate ducks, surfer ducks and dozens of additional varieties. With a lot of talent, vision and passion on the part of its owners, and a little microcredit, the business has been extremely successful.
Yashoda was working as a certified public accountant in 2000 when she decided it was time for a change. She was inspired to recreate her favorite childhood dishes from India, so she quit her job and began a food delivery service out of her kitchen in Albuquerque.
Naidoo approached ACCION with her mission statement and target customers written on a napkin. She wanted to open a restaurant. She refined her business plan, and ACCION provided her with a loan for $20,000 to lease and renovate space to open her first restaurant. Since that initial loan, Naidoo has gone on to open three of her restaurants, Annapurna’s World Vegetarian Café. Two are located in Albuquerque, and one is located in Santa Fe. She has built a business that employs 45 people and had sales of $1.5 million in 2010. Naidoo will never forget that ACCION took a chance on her and her start-up restaurant. In fact, she has gone on to commit over $15,000 in charitable contributions to ACCION so that the organization can continue to support entrepreneurs. “ACCION is a place where success is available to anyone with the passion, commitment and character to realize it. ACCION is the window through which entrepreneurs can envision a future of prosperity, regardless of our stations in life,” she said. Additionally, Naidoo has volunteered as an ACCION mentor, offering guidance to other business owners.
Fernand Loumouamou has been a farmer since 1975. Living in his native Congo, Loumouamou cultivated fruits and vegetables to sell. Everything changed in 1999. As the Second Congo War ravaged his country, he lost his family to the war. Forced to flee for his own safety, he had to start over in a Benin refugee camp where he lived for nine years. Loumouamou was once again resettled in 2008. This time, however, he would have to start over on a new continent, moving from Benin to Tucson, Arizona, with the support of the International Rescue Committee. He was eager to return to farming, but had no resources. Through the care and support of Catholic Community Services of Southern Arizona, Loumouamou found ACCION. His request to ACCION was simple. “I wish to request some materials to start gardening or farming work, in order to take care of myself,” said Loumouamou in a letter. ACCION provided him with a $200 step loan in the fall of 2009 for materials to start a landscaping business. Now with a fourth ACCION loan, he owns tools, his own truck, and a blossoming business.
A Growing Industry
Skeptics often think that with a flexible approach to lending and a client base that many perceive as risky, many of these microloans go bad. But that’s far from the case. ACCION New Mexico, Arizona, and Colorado’s historic repayment rate is over 93 percent. Other organizations in the ACCION U.S. Network have had similar repayment success. The ACCION U.S. Network has provided over 42,000 loans for over $305 million to support entrepreneurs, and the network continues to widen its reach. What started in San Diego, Chicago, New York, Texas, and New Mexico has expanded into many more communities and states and continues to grow. As ACCION continues to grow, it increases its impact in difficult economic times. This year, in Colorado alone, the number of loans ACCION issued through September has increased 138 percent over the same period last year. As the ACCION U.S. Network increases its growth, it hopes to support small businesses everywhere.