Seed Funds for the Smallest Start-ups
No safety inspector was about to give Kimberly Braley a permit to open Park Street Day Care. The building she had picked, a former church in Freeport, Maine, had train tracks running a few yards behind the back lawn.
Moreover, no local bank or credit union would lend her the small amount of money she needed to build a fence between the yard and the railroad and to buy a swing set. She was in a bind. That was two years ago, when her boss had abruptly closed the day-care center where Braley was working, leaving her to choose between self-employment and unemployment. Braley hoped to borrow start-up cash and relocate the day-care center. Loan officers at local banks and credit unionsmost of whom, she says, knew her, her clientele, and her potential to make money—told her, sorry, come back in two years with a "track record." The saddest part, says Braley, would have been to split up her group of pre-schoolers.
"Consistency is of the utmost importance," in child care, she says. Then she recalled having heard someone talk about Coastal Enterprises Inc., a nonprofit organization in the nearby town of Wiscasset. Coastal Enterprises is one of a growing number of nonprofit community groups nationwide that support local small-business start-ups with modest loans. Within three weeks of calling Coastal Enterprises, Braley had borrowed $1,500 at 12 percent interest, built a fence, obtained an operating permit, bought a swing set, and kept her diminutive charges together. "It was a small amount of money, but it made a substantial difference" in getting the day-care center going, she says.
Scores of local self-employment support programs like Coastal Enterprises have sprung up across the country. Unlike a lot of business-support centers, these programs don't simply help loan applicants with their paperwork. They make loans—small loans, or "microloans,' ranging from a few hundred to several thousand dollars.
Strings are attached, but they are to help. Most entrepreneurs borrowing from these "microenterprise" funds, as they are called, must be active in the funds'support groups for fellow entrepreneurs. or they must enter individual business burinmanagement training with microenterprise program counselors.
Coastal Enterprises, founded in 1977 by its president, Ronald L. Phillips, is a lot like the 100 or so newer microenterprise groups formed in the U.S. in the past three years. With about $3 million in its small-business lending fund (which was set up formally in 1987 with foundation grants), Coastal Enterprises targets low-income women and families—the unemployed, welfare recipients, or others 1 who may be on the brink of poverty—in 1 Maine's coastal region, says Phillips.
But Coastal is different from some newer microbusiness funds in that it lends money directly to individuals only. Some programs, on the other hand, embrace a philosophy of "group lending," which is a peer-panel method of making loans to the groups' members.
Among successful group lenders are the Mountain Microenterprise Fund, in Asheville, N.C., and the Women's Self-Employment Project, in Chicago. Participants in such programs form circles of four to six business owners each. Members of each group decide who may borrow first from the general loan fund, based on who seems most prepared to Invest and repay the loan. Program administrators play only minimal roles in group-lending judgments. Ability to borrow then moves serially about the group, one member at a time, with no one else eligible until the previous loan is at least close to being repaid.
Default rates among lending-group programs are low, studies show. For instance, the nonprofit Coalition for Women's Economic Development, which lends to groups of low-income women in the Los Angeles area, has extended 81 loans amounting to $147,000, says coalition workshop leader Isabel Duran. All but 2 percent of the loans have been repaid in full.
Most microbusiness programs get their funding from private foundations, or, as in North Carolina, from a state legislature willing to experiment with new business-development ideas. And now that the U.S. Small Business Administration (SBA) has seen how the private seed-capital community can help disadvantaged business owners, it has announced a $15 million pilot microloan program aimed at minorities, women, and poor would-be entrepreneurs. This fall, the SBA will begin a test of small loans through 35 selected nonprofit groups nationwide—Coastal Enterprises is one—departing somewhat from the conventional bank-lending system that leaves out the many entrepreneurs who lack collateral.
Turning poor people or people living in poor areas into entrepreneurs can present several problems, however, and the foremost are policy barriers, according to advocates for microenterprise. They explain that although self-employment may be a popular way to ease people off welfare, the rules of welfare can stand in the way. For example, residents of federal public housing are restricted by government rules from starting home-based businesses or earning money in their homes.
In addition, the 13.6 million recipients of Aid to Families With Dependent Children (AFDC) entitlements—to which Medicaid assistance also is tied—may not accrue more than $1,000 in personal wealth; business income is included in that total.
Joyce Klein, a microenterprise specialist at the Corporation for Enterprise Development, a Washington policy group, says more government leeway could be given to welfare-dependent people trying to become self-sufficient business owners. "You lose your benefits the second you get a loan or open a business," says Klein. "We think it would be good to see more flexibility [as to] when someone is technically employed."
The federal government, for a few test projects, has allowed its welfare rules to be waived for self-employment initiatives, and the results have been promising. On certain Tuesday evenings on the deck outside Rick Steingress's Candlertown Chairworks Inc., in Candler, N.C., a group of six entrepreneurs meets to swap advice. This is the Candler Group, one of 22 lending circles formed by the Mountain Microenterprise Fund. Steingress, the group leader, says the meeting is "sometimes rowdy."
The Candler Group's focus lately has been on Vicki Weiss and her husband, Howard, who have just borrowed about $1,000 from the Mountain fund for their business at 16 percent. The couple creates T-shirts bearing designs from Howard's heritage of Seneca Native Americans. Vicki manages the enterprise. The group wants to know how the Weisses' shirts are selling. Other members inquire: Any new accounts? Do you have a sales representative yet? Can you sell at wholesale prices?
"They've shed light in areas where if we hadn't joined the group, we'd have learned the hard way," says Vicki Weiss. "They really make you aware of what your business is about." Christopher Just, a former Peace Corps volunteer who is director of the $100,000 Mountain fund, says group members listen to one another's loan proposals, then grill them for details. "The group might ask to see letters of intent" from a member's customers, he explains. "A lot of times people are borrowing to buy equipment. The group will say, 'Show us a quote,' or, T know where you can get it cheaper.'"
Each lending circle, apart from the general Mountain fund, also starts a group savings account. Dues begin at $2 per meeting. Recently, the Candler group used a few hundred dollars of its savings to help one member, potter Cat Jarosz, buy highgrade clay in preparation for an upcoming pottery show. Jarosz would pay the loan back afterward.
These may sound like small sums all around. But as Kimberly Braley proved with Park Street Day Care, most start-ups don't need huge amounts of money. In fact, according to many entrepreneurs, having too much cash at the start can be a curse for a small business.
Today, Braley recalls the "extremely frustrating" ordeal of trying to borrow what seemed like a paltry sum of money from a bank, and then remembers how "thrilled" she was to get the seed loan from Coastal Enterprises. "I really feel like I owe a lot to Coastal Enterprises" for making the seed loan possible, she says. "Without them, I might have lost my clients."
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