For many entrepreneurs, launching a new small business is an exciting adventure. Creating a product or service, developing marketing and distribution plans, and finally opening the door to potential customers can be an exhilarating experience.
However, for some -- particularly low-income individuals -- that exhilaration is tempered by concerns over access to credit and financial services. Poor or few relationships with mainstream banks and financial institutions and problematic credit histories can limit the capacity of entrepreneurs to obtain the materials and resources necessary to start a business venture.
A new initiative of the Local Capital Markets Investment Fund -- a project of the Washington D.C.-based Corporation for Enterprise Development (CFED) -- is helping many low-income entrepreneurs access the financial products and services needed to get their businesses off to a healthy start. The Fund works in partnership with financial institutions to develop products and services that address the economic needs of low-income communities.
Specifically, the Integrating Savings and Credit: Promoting Asset Development Among Microentrepreneurs initiative links micro-entrepreneurs holding Individual Development Accounts (IDAs) --matched savings programs designed to help low- to moderate-income individuals build assets and financial literacy -- with affordable business loans, training and technical assistance.
A micro-enterprise is a small business, owned either by an individual, family or through a formal partnership, that has fewer than five employees, is started with less than $35,000 in capital, and generally lacks access to commercial financing. Industry estimates indicate that there are almost 13 million micro-businesses in the United States. Mott support for the field of micro-enterprise has totaled more than $36 million since 1984, while Foundation support of IDA-related initiatives has totaled almost $7.3 million since 1994. The $400,000 Integrating Savings and Credit initiative was launched in 2003 with the support of a two-year grant totaling $250,000 from Mott’s Pathways Out of Poverty program. Other funders include the J.P. Morgan Chase and John D. and Catherine T. MacArthur foundations, and the Enterprise Corporation of the Delta. To date, five financial institutions serving low-income communities are participating in the pilot initiative, including:
Eliza Mahony, senior program manager at CFED, notes that the initiative’s groundwork was laid in 2001 when the First State Community Loan Fund -- a Delaware-based community development financial institution -- approached the Local Capital Markets Investment Fund for help with integrating savings and credit services for low-income consumers. In particular, First State was interested in connecting IDA consumers with access to affordable small loans, based on the premise that, by developing the tools and incentives for them to save, low-income individuals can increase both their credit-readiness and credit-worthiness.
Mahony notes that Caroline Glackin, executive director at First State, helped CFED explore this connection between the savings history demonstrated by IDA participants and their ability to repay a small loan.
“It was a pretty simple idea, but one that had pretty profound implications for folks who didn’t qualify for any mainstream source of credit,” said Mahony. “People saving on a monthly basis through IDAs are building an important source of flexible capital for their businesses and demonstrating their ability to repay small loans. The result is healthier businesses that are more credit-worthy.”
For Glackin, understanding the needs of low-income entrepreneurs and the importance of developing effective strategies to address those needs was integral to creating an initiative that seeks to strengthen their future success.
“It's about seeing services through the eyes of the entrepreneur. Some don't necessarily focus on whether they want to save or borrow. They want one thing: for their business to succeed, and it's up to us to design services that support that success.”
More than 200 micro-entrepreneurs currently participating in the five-site pilot initiative are accumulating IDA-savings for start-up and development of their businesses, with the goal that more than 100 will secure small loans to supplement their new ventures. Mahony notes that, based on the results of the pilot, the sites could broaden the availability of integrated savings and credit products throughout their respective markets. CFED will also look to replicate successful strategies in as many as 25 additional institutions.
Mahony is confident that such access to affordable and integrated financial services will play an important role in the survival and growth of those new ventures. She also believes that the initiative is critical to helping “level the playing field” for low-income businesses and entrepreneurs, and to building their relationships with mainstream financial institutions.
“For many lower-income entrepreneurs, IDAs are the only way to build good credit and equity for their businesses, which is so important to their success," Mahony said. "Furthermore, as we show commercial lenders that these folks can save money and repay their loans, it will open up new doors in terms of access to financial services.”
Mahony notes that building on lessons learned from the initiative and exploring replication opportunities is a key focus of CFED and its Local Capital Markets Investment Fund. She believes that bringing such programs to scale requires attracting commercial lenders to the table; calling for public policies that reform credit reporting systems and regulations and support savings and credit linkages for low-income communities; and developing resources, including a planned CFED tool kit, that offer practical implementation strategies for other providers.
“We need to do this right, to replicate these strategies in a way that makes entrepreneurship a viable option for everyone, thereby helping families around the country move out of -- and stay out of -- poverty.”
Additional Resouces
- Click here to read an article from a recent issue of our quarterly magazine, Mott Mosaic on efforts by organizations to address issues of predatory lending practices.
- Click here to view a .pdf report by the Aspen Institute's Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination on ways that micro-enterprise programs help entrepreneurs place their products in more lucrative markets.
- Click here to read a story from a past issue of our quarterly magazine, Mott Mosaic, that updates the work of the Michigan IDA Partnership.