Income & Employment / 2013
Building Strong Small Businesses through Microlending
Working families in Los Angeles face the challenges of managing insufficient money, finding affordable housing, raising healthy families, and preparing for the future. Nearly half of LA’s households do not earn enough to meet basic expenses. The region lacks adequate well-paying jobs in growth sectors; this lack of opportunity is compounded for low-income and minority households by the poor education system. For many households, entrepreneurship is a primary route to financial stability. Small business ownership creates opportunities for families living in poverty to pursue stability and economic mobility, while creating jobs in their communities. Research has shown that if one in three microenterprises hired an additional person, the U.S. would return to full employment; if every microbusiness generated $5,000 more annually, this would add $20B to the economy. Yet only 50% of small businesses survive, often due to an inability to access the capital they need to grow because of language and cultural barriers, limited assets, low capital needs, and poor/insufficient credit.
Opportunity Fund has a vision that every small business in Los Angeles can access the financing and support needed to realize its full potential to create wealth and jobs. As California’s largest nonprofit microlender, Opportunity Fund provides loans of $2,500 to $100,000 at affordable, fixed interest rates to small business owners with small capital needs and imperfect credit. We offer a fast, streamlined application process; flexible underwriting criteria and collateral requirements; and client-driven business advising designed to meet the needs of low-income entrepreneurs. Our relationship-based lending model removes barriers to credit that many of our borrowers face when declined by banks, including limited credit history, low net worth, inadequate time in business, lack of collateral, and small financing needs.
As part of our commitment to serving the unique needs of low-income entrepreneurs, Opportunity Fund offers EasyPay—an innovative automated loan repayment system that allows borrowers to repay loans through a small, fixed percentage of daily credit/debit card sales. Instead of making monthly payments by check, EasyPay borrowers can base their loan repayment on their actual credit/debit card revenue by “splitting” a fixed percentage of each card transaction toward loan payments. Opportunity Fund reports these repayments to the credit bureaus, so that borrowers are able to build credit over time. In practice, the automatic split means that during busy days (i.e. weekends for a restaurant), the business repays more, whereas during slow days (i.e. weekday for a clothing retailer), the business repays less. It also means that businesses with seasonal sales cycles have a repayment schedule that effectively matches their revenue cycles. EasyPay provides a convenient way to meet the capital needs of small businesses and help borrowers build credit.
Opportunity Fund’s microlending program serves entrepreneurs like David, who recently sent his fourth son to college with help from Opportunity Fund (and our EasyPay loan). David is proprietor of Mirna’s Market, a swap meet stall in South Los Angeles that features religious and party supplies targeting the city’s immigrant community. As a small business owner, David was able to keep his sons close by as they grew up—helping them do their homework in the store or teaching them to work the cash register. By providing access to affordable and convenient capital to purchase inventory and stock his shelves through EasyPay, Opportunity Fund has helped David keep his business strong and set aside savings to pay for his sons’ education.
What are some of your organization’s most important achievements to date?
Opportunity Fund has a vision that every small business in California can access the financing and support needed to realize its full potential to create wealth and jobs. Since 1995, we have originated over 3,200 loans, totaling $35 million, to disadvantaged microentrepreneurs in California’s largest urban centers. As noted above, our borrowers have an 85% business survival rate, and each Opportunity Fund loan creates or maintains an average of 2.5 jobs. Additionally, Opportunity Fund’s loans result in a “ripple effect” of new revenues, wages, and taxes—every $1 we lend generates nearly $2 in new annual economic activity.
In 2011, Opportunity Fund successfully launched the pilot of our EasyPay loan product. EasyPay builds on our successful microlending results, taking this proven strategy one step further by leveraging technology to expand the pool of potential microloan borrowers, simplify the repayment process, and help entrepreneurs improve business performance.
Since its inception, Opportunity Fund has grown from a local, multi-bank consortium serving Silicon Valley to a nationally-recognized microfinance institution. In the process, the organization’s leadership has seized on opportunities to introduce innovative strategies to expand our impact on underbanked communities in the San Francisco Bay Area and Greater Los Angeles. Opportunity Fund has successfully adapted to the shifting economic landscape by developing new products, implementing new outreach initiatives, and nurturing new partnerships that enable clients to build assets despite changing market conditions. At the same time, Opportunity Fund has followed a smooth growth curve from a staff of five people to more than 50 in four locations.
Opportunity Fund is seen as a thought leader in microfinance, with a track record of community impact and a reputation for innovation in developing new microfinance strategies that promote economic opportunity and meet clients’ needs. As California’s largest nonprofit microlender, Opportunity Fund is the only organization providing affordable, appropriate credit to LA’s low-income small businesses at any scale—we originated more than 300 microloans in the County in 2012 (and 1,002 microloans state-wide).
Opportunity Fund has always been distinguished among economic development organizations for our commitment to reaching the hardest-to-reach clients and achieving deep impact. Our inventive approach to community development has garnered a variety of awards, including selection twice for the prestigious Skoll Foundation Award for Innovation, Bank of America’s Neighborhood Excellence Award, and the Small Business Administration’s Financial Services Advocate of the Year award for our microenterprise work.
Please identify any partners or collaborators who will work with you on this project.
• Industry outreach: We target industries with high numbers of disadvantaged small business owners who lack access to financing and support, such as trucking, landscaping, and mobile food.
• Banks: We have built a network of bank representatives to facilitate referrals of clients who have been declined for a loan.
• Businesses: We also leverage relationships with business services providers to raise awareness and generate referrals, including tax advisors, CPAs, and equipment vendors (manufacturers of food trucks, dry cleaning equipment, etc.).
•Community partners: We have referral relationships with organizations that serve local low-income and disadvantaged communities, such as Vermont Slauson Economic Development Corporation
Please explain how you will evaluate your project. How will you measure success?
Opportunity Fund uses a variety of performance indicators to measure the success of our microloans and our small business clients. In the short term, we track the number of applicants and number, dollar volume, and type of loans originated, as well as client characteristics such as income, ethnicity, gender, credit score, household size, type of business, sales, and number of employees.
Over time, we measure the impact of our loans by tracking changes in borrower household income; growth of business sales and income; job creation; and business survival rates. We also gather data related to client satisfaction and confidence in running their business as a result of Opportunity Fund’s microlending and advising services. This data is collected using MicroTest, a performance evaluation tool developed by the Aspen Institute and used by the nation’s leading microenterprise organizations. Data on these outcomes is measured starting two years after the loan is made, and is collected through phone surveys and tax returns.
As noted above, Opportunity Fund seeks to invest $2.3 million in 350 small businesses in LA’s underserved urban communities in the coming year. Based on previous results (as measured through MicroTest surveys), we project that these investments will generate positive outcomes for our borrowers, including the creation/retention of 2.5 jobs per loan on average, a 20+% increase in business revenue, and an 85%+ business survival rate.
In addition to outcome and impact evaluation, Opportunity Fund uses internal measures to gauge our program effectiveness. We track staff time, marketing expenses, operating costs, loan capital, fundraising capacity, and donated services required to operate the program. We measure all phases of the loan pipeline—from inquiry through application to loan approval, decline, or withdrawal—and track the number of inquiries by source, conversion rate, and outcome to determine which sales channels are most effective. As a lender, Opportunity Fund closely monitors our outstanding loan portfolio as an indicator of program performance, and periodically reviews our underwriting guidelines if necessary. This data enables continuous improvement to the program’s efficiency and impact, and ultimately enables Opportunity Fund to serve more clients—and with greater impact—in the future.
How will your project benefit Los Angeles?
Opportunity Fund is pioneering a new approach to small business support that combines a mission-driven strategy and commitment to impact measurement with the market knowledge, efficiency, and reach needed to make a sustained difference in the lives and livelihoods of Los Angeles’ small business owners. By deploying capital to low-income, underserved small business owners, our microlending program helps drive small business growth and job creation in the communities that need it most.
Opportunity Fund’s borrowers have an 85% business survival rate; each loan we originate creates or sustains 2.5 jobs on average. The financing and support we provide our small businesses helps them increase business revenues by an average of 20%.
The mainstream financial industry offers little to help small businesses access the capital they need to grow and thrive, especially in places like East LA, Boyle Heights, and Downtown. As a nonprofit, mission driven, financial institution, Opportunity Fund targets entrepreneurs who operate their businesses (and, in many cases, live their lives) outside the financial mainstream. In LA, our borrowers are 98% minority, with an average median household income of less than $24,000.
Opportunity Fund made our first microloan in LA in 2010. Through LA2050, we seek to scale our microlending program in the region’s underserved communities to support more than 350 small business owners each year in LA County (and 650 in the Greater Los Angeles region). This loan volume represents a big step toward our vision of a truly inclusive financial system in which every small business owner has access to affordable capital to build a vibrant enterprise, increase household income, create jobs, and support a family and a future. It means that in the coming year, Opportunity Fund will:
- Invest $2.3 million in small businesses in undercapitalized neighborhoods in LA
- Create or retain more than 850 jobs, primarily in minority-owned and women-owned businesses
- Generate $4 million in new annual economic activity in LA through new spending, wages, and tax revenues.</p>
Natasha is the Co-founder and CEO of CoolHaus ice cream, a gourmet ice cream business that started out as one food truck in Los Angeles and now features 10 trucks and 55 employees in 4 cities, as well as a storefront in Culver City and distribution through Whole Foods Markets. When Natasha wanted to purchase a second truck and start expanding her business, she could not qualify for conventional financing. CoolHaus was less than two years old, and was not yet profitable. In addition, Natasha was still paying off student loans, and her credit score reflected this debt. Instead, Natasha came to OF for a $25,000 loan to help the business expand. As Natasha describes, “The loan from Opportunity Fund was the catalyst at a key moment in our growth!” CoolHaus has since received two more OF loans to support national expansion.
What would success look like in the year 2050 regarding your indicator?
Opportunity Fund has a vision that every small business in Los Angeles can access the financing and support needed to realize its full potential to create wealth and jobs. While we have no illusions that our microloans can eradicate income inequality, we believe that strong investment in the region’s small business community can drive economic growth and create jobs that offer a living wage. Many of LA’s most economically distressed neighborhoods are also hotbeds of entrepreneurial activity. By providing access to capital and support for these small businesses, Opportunity Fund can help them grow and thrive—offering a path to financial stability and economic mobility.
We know that every loan we make creates and sustains more than two jobs, and that every $1 we invest results in a multiplier effect that generates almost $2 in new economic activity. By seeking to scale microlending in Los Angeles, Opportunity Fund is positioned to help thousands and thousands of small business owners access hundreds of millions of dollars in microloans by 2050—supporting job creation at significant scale while spurring economic growth in communities that need it most.