Micro-lending and the Entrepreneur

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Every little bit adds up, and more than $5 million in small business lending has added up in Detroit.

In the past five years, three microfinance programs have launched in the city, creating a loan pool of more than $5 million and offering loans between $500 and $100,000 to area entrepreneurs who need to start or grow their business, but don’t qualify for traditional lending because they are too small or too new, don’t have good credit or simply don’t need to borrow enough money.

First, San Francisco-based Kiva launched, offering crowdfunded loans of up to $5,000 that are matched by the John S. and James L. Knight Foundation. Then the Rotary Club started Launch Detroit, which lends up to $2,500 to entrepreneurs who complete a business education program at Baker College. And in 2014, the Detroit Microloan Collaborative opened with a $5 million investment from Ohio-based Huntington Bank. That effort is part of the bank’s $25 million Pure Michigan Micro Lending Initiative that it developed with the Michigan Economic Development Corp.

“We strongly believe small businesses and entrepreneurs with good ideas need access to this step up,” said Jim Dunlap, Huntington’s lead executive for Michigan. “It puts them on the ladder of credit, establishing them to move on to bank lending as they succeed and grow.”

Finding that step up has been a struggle for small business owners everywhere since the recession. But the pinch is particularly painful in Detroit, where lending had all but disappeared for firms with less than $1 million in annual revenue, according to a report by the Federal Reserve Bank of Chicago. That lack of capital has opened the door to nontraditional lenders and microloans in Detroit and across the country. In 2014, the value of microloans nearly doubled from 2013 to just under $209 million, according to the Aspen Institute’s FIELD program, which tracks the industry.

“There has been a gap in small business lending in Detroit for quite a while,” said April Boyle, executive director of Build Institute, a Detroit-based nonprofit that specializes in training and support for entrepreneurs. “Most startups, regardless of sector, are started with friends and family money, but we have a population of people here in Detroit that don’t have access to that resource because families haven’t been able to accumulate wealth for a variety of factors.”

Boyle is one of the people who helped bring Kiva to Detroit. Originally a Kiva funder herself, she knew the organization’s crowdfunded loans – like Kickstarter, but rather than gifts, supporters pledge zero-percent-interest loans – could help the city’s small business community. She was right: Since 2011, 74 loans have been raised in Michigan for a total of $320,650, with a nearly 100 percent repayment rate.

That type of lending would be nearly impossible for banks. These startups just don’t need to borrow a big enough sum – often less than $50,000 – which isn’t lucrative to the banks since it costs the same amount to vet a tiny loan as a multimillion dollar deal. And even if they did write small loans, banks aren’t equipped to offer the financial education and mentoring often needed to turn entrepreneurs with ideas into financially sound businesses. So it makes sense to Chris Cook, director of capital access at the MEDC, for public, private and philanthropic sectors to step in with microlending, so firms can grow and create jobs.

We’ve seen it as being a success,” he said. “We want to assist the private sector in increasing its availability of capital, so it could make more loans to businesses.”

In the case of the Detroit Microloan Collaborative, Huntington funds the loans and the MEDC guarantees them, but neither organization is involved in the loan selection and vetting process. That falls to the local nonprofit partners: the Detroit Development Fund, the Michigan Women’s Foundation and the Detroit Micro-Enterprise Fund. The three work together to offer loans of $5,000 to $100,000 and require that potential clients attend rigorous educational programs with Lifeline Business Consulting Services. That organization mentors them, addresses financial planning, business plans, market research and more.

As of January, the collaborative had closed 36 loans for $1.2 million, and the program is expanding. The second phase of the Pure Michigan Micro Lending Initiative just launched in Lansing and will serve cities in the lower part of the state.

“There are a lot of companies out there in Detroit’s neighborhoods that if they could get another $10,000, they could move themselves up the ladder,” said Ray Waters, president of the DDF.

Bryant and Kummbareh Owens are two such entrepreneurs. The husband-wife duo recently started EverButter, a natural hair care company. But when it came time to expand their products, they realized they needed to invest in better photography equipment to create more effective marketing materials. They considered taking on credit card debt, but they didn’t want to pay nearly 30 percent interest. Instead, they opted for a Kiva loan after discovering it through the Build Institute. Since taking out the $2,000 loan, they said they’ve grown their revenues by 400 percent.

“This particular loan made it a no-brainer,” Bryant said. “If we didn’t do the loan, we would’ve had to outsource our product photos and that would have cost us money, and it would’ve slowed down the whole process of our growth.”

Having this network of microlenders makes Detroit unique in the world. Few cities have active lenders, let alone several options. Even Gameen Bank, the largest national and international microlender, only operates in a handful of U.S. cities. As such, other cities are now calling on Detroit to be the experts on how to create policies that support this work.

Lawrence Wright, president of Launch Detroit and a Rotarian in the Taylor Rotary Club, gets calls from chapters around the country asking how they created their program. He tells them that they can easily implement the program. After all, Rotary District 6400 created it with a seed fund of $65,000 from members’ own pockets.

“We are trying to help those who need it the most,” he said. “Rotary does a lot throughout the world, and we like that we are able to do something positive in our own area.”