Economics From the Bottom Up
Microlenders Sustain Austin's Newest Entrepreneurs
By Kevin Fullerton, Fri., Aug. 10, 2001
It was about a year and a half ago when the cash-soaked entrepreneurs who were riding the crest of the biggest economic swell Austin's ever seen convened their second 360 Summit: a flashy affair in which tech leaders loudly declared their desire to become philanthropists as well as multimillionaires. The participants who converged on the Four Seasons Hotel agreed they had much to give back to Austin, but how could they be sure their largesse made a difference?
About that same time, Chioma Okoro had taken refuge at SafePlace, the Austin women's shelter, after a traumatic separation from her husband, with whom she'd moved to Austin from Nigeria a few years before. Okoro was in a serious bind. She had a job, but didn't know how she was going to work full time and raise three young children by herself. If she could open a child-care center in her home, Okoro reasoned, that would allow her to be both a mom and breadwinner. But Okoro -- who describes her former self as "the kind of African woman who didn't even open her own pay check," deferring all financial matters to her husband -- had no credit history and no chance at getting a bank loan. How was she supposed to secure a stable life for her family?
In the past, Austin's affluent givers might have thought the only way to help single moms like Okoro was through the area's numerous charitable organizations that spread a safety net under low-income residents -- providing rent assistance, counseling, health care, and a variety of other social services. But what Okoro needed to take charge of her circumstance was capital. She found it when someone directed her to a nonprofit lending group called Accion Texas, which uses government grants and contributions from banks and other corporations to provide loans for very small businesses. Okoro borrowed $20,000 and a few months ago opened JCC Family Child Care in Northeast Austin.
In recent months, tech execs and venture capitalists have been taking a close look at stories like Okoro's, and they're getting excited about the potential of Accion Texas and other nonprofits that harness market capital to promote greater self sufficiency for those on the lean side of the city's equity gap. These days, there's more urgency than ever for the high-flying entrepreneurs who ushered in the new economy to atone for a market that has made Austin one of the most economically divided cities in the nation. A June report of the Austin Equity Commission found that over the past decade, a full 50% of the area's private-sector wages went to the most affluent 20% of the population, up from 38% 10 years ago. Large percentages of racial minorities, and particularly women, have been left at the very bottom of the pay scale, where $6 an hour is still a common wage.
Based in San Antonio, Accion Texas opened an office in Austin just two years ago. On July 11, their executive director, Janie Barrera, pitched her organization's mission to a group of business leaders assembled by the Greater Austin Chamber of Commerce. Accion's business has been booming in recent months; the nonprofit lent out $1 million statewide in the first six months of this year, compared to $10 million over its first seven years in existence.
Although unusual among lenders, Accion Texas is not alone. The Austin Community Development Corporation (CDC), established seven years ago, invests predominantly in minority-owned businesses located in East and South Austin. In May, Austin CDC director Margo Weisz so impressed partners at Austin Ventures, the venture capital firm whose name has become synonymous with the area's once-raging start-up scene, that she left the room with a check for $70,000. Needless to say, Weisz is planning more such outreach.
Planting and Recycling Capital
Weisz has had a few doors opened for her by Eugene Sepulveda, a vice-chair on the Greater Austin Chamber of Commerce who also sits on the boards of more than 40 nonprofits in Austin, including the Austin CDC, and is a consultant with the financial services firm PricewaterhouseCoopers. Sepulveda says now that the heady days of chasing start-up comets is over, investors have taken a new interest in the work of the city's nonprofit "jewels" -- such as Accion Texas and Austin CDC. (Foundation Communities, formerly Central Texas Mutual Housing Association, is another nonprofit that specializes in building and refurbishing residences which lease at below-market rent.) These institutions have forged reputations for converting small investments into large social returns by recycling their money over and over.
"Their return on investment is as big as Vignette's or Dell's," Sepulveda says. That's not to say that investors expect nonprofits to pay back cash dividends in return for their financial support, Sepulveda says. But getting behind organizations that know how to plant capital in poor areas, improve people's fortunes, and get money back at the end of the day that can be used to grow the mission is a big turn-on for business people, he says.
The two nonprofit lenders have operated in near obscurity for much of the past decade, but their clients have become visible contributors in the local community. The Austin CDC is the leading financier of child care centers in the city, helping to capitalize an ambitious early learning center for 100 children, Rosewood Oaks Primary, located across the street from the Booker T. Washington public housing complex. Thanks to the Austin CDC, the containers bearing the popular Marta's Flan no longer leak all over people's refrigerators -- owner Marta Guzman got a loan from the nonprofit to improve her packaging. Numerous mechanics, body shops, and construction companies have also found capital to expand through the Austin CDC, which reports that its loans have created about 500 jobs. The loan default rate, says director Weisz, is less than 7%.
Accion Texas, meanwhile, remains the only lender in town that will lend to start-up businesses whose owners are making their first forays as entrepreneurs. Austin Bicycle Cabs got its start through Accion Texas with a $2,000 loan to Jason Norwood, whose previous professional career consisted almost entirely of waiter gigs. Eugene and Claudia Conner were able to keep their new restaurant, Gene's New Orleans Style Restaurant, up and running this summer with an infusion from Accion. Just to the west of the Conners' restaurant is the stretch of East 11th Street long slated for massive commercial and residential revitalization. Millions in public dollars have been sunk into the cumbersome, years-old project, but the Conners just needed $15,000 to replace kitchen equipment and keep the AC going. Now, their restaurant has developed into a popular lunch joint for the Central Business District crowd.
Chandra Beal got the money she needed from Accion to self-publish Splash Across Texas!, a guide to the swimming holes and history of Central Texas. Jay and Cindy Arredondo bought a credit card machine for their curbside cactus stand on South Lamar with an Accion loan, and hope to use Accion again to open a store. Stone carver Aaron Atchley cut and installed the black granite that adorns the exterior of the building that is now Kenichi Restaurant, put in the stone floor at Carmelo's, and has done countertops for the Tivoli millionaire set. He says Accion "saved his butt" with a loan that allowed him to meet payroll after he got stiffed by a contractor on a job.
The small businesses fostered by Accion Texas and the Austin CDC may not form the foundational bedrock of the Austin economy, but they do contribute to the eccentric, home-grown services on which the city prides itself -- yet that are often, as in the case of child care, in desperately short supply. Like Okoro, the nonprofits' clients are people who, because they have no business record, a poor credit history, or are simply asking for loans too small, can't get help from banks.
Finding the First Money
In the wake of the Austin Equity Commission report, some business leaders and economists have trotted out the predictable rejoinder that the free market can't be manipulated to put people on a more equitable footing, lest we risk fearful punishment from the invisible hand of commerce. Equality of opportunity is the best we can hope to achieve, the supply-siders say.
Yet as any aspiring entrepreneur without a family fortune or an already high-paying job knows, business opportunities are typically the sole purview of the affluent. Following the banking consolidation of the Eighties, says Weisz, banks are less inclined to spend time or energy considering loan applications from new, small businesses. "Banking has become more high-speed, more high-process," says Weisz. "Underwriting a $50,000 loan takes the same time as underwriting a $5 million loan, so they really try to cut back on the smaller loans."
Angel investor Jim Hoover of IDM Partners, who agreed to chair Accion Texas' advisory council when it brought an office to Austin, agrees that the investment world isn't so good at rewarding the hard work and ambitions of fledgling entrepreneurs if they happen to be poor. "Entrepreneurship is the business energy of our country," says Hoover, but "where it gets left in the dust is with the individual who can't get that first two or three thousand dollars, who can't get a credit card. That's the part that's been overlooked."
During the go-go Nineties, the city's capacity for spurring economic development in poor neighborhoods was quickly overrun by the soaring costs of real estate. Unfortunately, says Foundation Communities executive director Walter Moreau, city leaders didn't think to negotiate partnerships between the companies paying out six-figure salaries and the nonprofit community trying to provide shelter and economic opportunities for the folks whose fortunes didn't rise with the boom. The results of that lack of planning ought to now be obvious to even the most coarse-hearted free market proponents: As of last year, South and East Austin had 25% fewer businesses per capita than the city as a whole, and about four in 10 residents live below the poverty line. The issue of income disparity has pushed its way to the top of the civic agenda. UT business professor Steven Tomlinson says local companies are realizing that persistent poverty threatens the health of the business community as a whole. "They're looking for where [the lack of] cash is the bottleneck to growth," says Tomlinson. "In a slower period, it's time to make those investments, to prepare for the next growth spurt."
Community-based lending first gained international attention in Bangladesh 25 years ago when a native doctor returned from the United States and began lending women small sums to buy sewing machines and cookware for commercial use, in what became the now-legendary "microlender," the Grameen Bank. Since then, microlenders in the Third World such as Accion International (with which Accion Texas is affiliated) have grown into billion-dollar entities. Former President Bill Clinton made community reinvestment a focal part of his national agenda, establishing a U.S. Treasury fund to promote investment in Community Development Financial Institutes (CDFIs) -- lending groups that focused primarily on depressed areas. More than 300 CDFIs have since spread out across the country -- but in Texas, former governor George W. Bush twice vetoed legislation that would have set up a state investment program to fuel the development of CDFIs.
But small-scale lending to women, minorities, and others with ambition and talent but no collateral has been available in Austin since 1994, when local banks established the Austin CDC as a way to distribute loans to low-income borrowers after the federal Community Reinvestment Act of 1977 required them to prove they weren't neglecting poor neighborhoods. (Texas Senator Phil Gramm has been trying to kill that reform for years, but hasn't yet managed it). Weisz took over as director shortly after the Austin CDC was founded, and has run the ship so tightly that a recent study found that the Austin CDC's return on investment is nationally the highest of any similar organization. The nonprofit is fueled by federal block grants awarded by the city (which this year agreed to substantially increase the Austin CDC's allotment), and private contributions. Sometimes, the Austin CDC makes deals happen by helping arrange more flexible loan arrangements that encourage banks to invest in businesses. For instance, to raise a loan for Rosewood Oaks Primary from Compass Bank, the Austin CDC agreed to kick in a portion of the capital but let Compass have the first lien on the lender's collateral. The nonprofit has grown its original $40,000 loan portfolio to $2 million, making loans primarily in areas where households earn from $14,000 to $19,000 a year.
Looking for Customers
The Austin CDC has attracted the support of not only liberal activists but bootstrap capitalists. Doug Hartman, former executive vice-president of Hartland Bank, sits on Weisz's board alongside Reymundo Ocañas, director of the Texas Association of CDCs. "A lot of staunch conservatives love this stuff," says Weisz. "They love it."
The Austin CDC has not even begun to tap its potential market in Austin, Weisz says; a recent market analysis that tracked how many businesses use financing other than commercial bank loans -- such as credit cards or personal loans -- shows that there's at least another $48 million in debt that Austin CDC could service, she says. In fact, for both the Austin CDC and Accion Texas, finding the bankable clients that need their help is as big a problem as finding the money to lend. It's not as if the nonprofits are out looking for losers who can't turn a dime without someone holding their hand, says Weisz. In low-income areas, people often have to go into personal debt or use family loans to keep their businesses afloat because of credit problems that weren't always their fault, such as health problems or losing a job. "You just have a few slow pays, and you get dinked" on your credit report, says Weisz.
Having already been rejected for bank loans to expand their restaurant because their business was new, the Conners were surprised when representatives from both Accion Texas and Austin CDC approached them to ask if they needed money for renovations. "We thought, 'Yeah, right. Ain't nobody going to loan us no money,'" says Eugene. But this summer the Conners were able to add a front patio to accommodate their burgeoning lunch crowd.
Last month, at a lunchtime meeting of Accion Texas' advisory council here in Austin, one of the most pressing topics for the small business leaders, software company presidents, and investment bankers gathered, was how to expand Accion's visibility and attract more clients.
"We want to become self-sufficient, and we only do that by doing thousands of loans per year," says Accion Texas director Barrera, who says Accion now covers about half of its operating costs with interest off its loans. But the council was also trying to come up with ways to attract more volunteers to counsel loan applicants. Lending to higher risk clients unfamiliar with the loan process is hard work, Barrera says, but it's the human investment Accion makes in its clients that allows the nonprofit to succeed with businesses that banks write off. Accion will accept cars, jewelry, or tools as collateral, Barrera says, and Accion helps clients network with each other for mutual aid.
Hoover says the business education that clients receive through nonprofit lenders is part of what makes their work exciting to investors like himself. Small entrepreneurs asking for a few thousand dollars from nonprofits today may grow into the weightier commercial interests talking to bankers and venture capitalists tomorrow. "Whether we give them a loan or not," Weisz says of her applicants, "they walk away with a full evaluation of the weaknesses and strong points in their business plan. From banks, they walk away with a rejection letter."
Banks, however, remain vital pillars for the missions of both the Austin CDC and Accion Texas. They are among the nonprofits' top donors, and most client referrals come from banks' lending officers. Banks don't like it when they have to turn away lots of applicants, especially low-income and minority applicants, because they fail to meet credit or income qualifications. So they send them away with the phone numbers of nonprofit lenders.
Kathy Estes, a vice-president of Frost National Bank in Austin in charge of small-business banking, says the goal of her bank is ultimately to make applicants bankable. But, she says, there are people with solid business skills and good character who have credit issues that the rules don't allow her to work with. In helping applicants find a lender such as Accion, Frost hopes they'll eventually come back to do business. For many people, says Estes, "getting a loan is the weakest link. They may know their business inside-out, but when it comes to financing, they're at a loss."
Atchley, for one, was sitting at Estes' desk only a few months ago hoping for a Frost loan to get him through a rough period in which he couldn't collect for a major subcontracting job. Unfortunately, Atchley, a 15-year veteran of his trade who claims he can do the same work with $2,000 worth of tools that larger companies need a quarter million dollars to do, is also a bit of a cosmic cowboy, and once spent an hour waiting on the phone for a psychic to talk to him. When he disputed the bill, his credit got "dinked." So Frost referred him to Accion, whose loan kept Atchley from filing bankruptcy and will help repair his credit rating.
Not all clients who approach Austin CDC or Accion Texas are in straits as dire as Chioma Okoro or Atchley. When Jay Arredondo came to Accion, he had already sold his car in order to leave his $6 an hour job at a nursery and invest in the cacti that he'd developed a special talent for growing. Chandra Beal had grown bored at her job and wanted the chance to pursue a passion when she published her book. But most nonprofit clients do share one thing: a dissatisfaction with their status quo -- a sentiment the American capitalist system purports to honor and reward.
Will Austin's commercial establishments get fully behind the efforts of Austin CDC and Accion Texas to open the doors of opportunity wider to people not invested in digital design or large-scale "business-to-business" consulting? Sepulveda says development in lower-income neighborhoods, particularly the growth of educational child care facilities, has become "hugely relevant" to employers. "You see a lot of business and political leaders joining with nonprofit leaders to try and come up with solutions," says Sepulveda. "I wouldn't say there's been a great deal of investment made yet, but it's my sense that there is significant financial investment right around the corner."
Nonprofit leaders who have long been critical of local government and companies for not taking a stronger leadership position on difficult social issues such as low wages, lack of affordable housing, and children's poor academic performance, say they are cautiously optimistic that the mood may be changing.
"In the past, the Community Redevelopment Act has been about, 'How many boards and how many dinners for nonprofits do you go to?'" says Barrera. "Now [Accion Texas] is a perfect vehicle for change." But overcoming the perception that community and microlending is just another welfare handout won't be easy, says Sepulveda.
Hoover says it's time for private interests to re-evaluate how well the market really serves all its citizens. "We gear ourselves to be the number one economic power in the world, yet there's been tens of thousand of individuals who have the same lack of opportunity [as in Third World countries], and we're just now figuring it out."
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