Among small business owners in Michigan, access to capital remains one of the most significant challenges, especially for people in underserved communities. This seems to be true even in places with improving economies, like West Michigan. The area has seen a strong post-recession recovery in recent years, and ranks highly in the prevalence of investors. WalletHub named Grand Rapids #2 in its 2016 rankings of “Best Large Cities to Start a Business,” yet it was ranked 43rd out of 150 cities analyzed in terms of access to resources.
Michigan is not alone in this situation. Data from MicroTracker (an initiative of the Aspen Institute) suggest that there are 10.8 million small business owners in the United States, including many in Michigan, who cannot secure loans to grow their businesses.
One creative solution is microlending, which involves providing small loans to entrepreneurs who may not have access to traditional bank financing. This is not a new idea, nor did it originate in the United States. Microlending has a long history, having been pioneered in Bangladesh in the 1970s by Muhammad Yunus, a Fulbright scholar and economics professor. Yunus saw that the idea had great potential to alleviate poverty and empower women entrepreneurs in developing countries. His work earned him the Nobel Peace Prize in 2006.
Since then, the microlending model has been used quite successfully throughout the world. The Philanthropic Enterprise estimates that it has helped more than 137.5 million poor families pull themselves out of poverty, and international microlending organizations continue to proliferate.
Within the past decade, however, microlending has seen a surge here in the United States. The Aspen Institute estimates that there are well over 500 microenterprise programs in the U.S. alone. And while each program is unique, the overall goal remains the same: to increase access to capital for entrepreneurs, especially those in underserved communities, so that their businesses can thrive and their families can achieve economic stability.
Several organizations in Michigan now have microlending programs, including Grand Rapids Opportunities for Women (GROW). Since its inception in 2011, GROW’s microloan program has served 53 businesses with loans of over $1 million. That number includes 21 start-ups, and those businesses have created nearly 100 new jobs in West Michigan. And of the businesses served by GROW’s microloan program, 51 percent are minority-owned.
With the loans -- which generally range from $1,000 to $50,000 -- entrepreneurs are able to start or grow their small businesses, putting them on a path to financial success. Microloan funds can be used for business equipment, inventory, materials, or working capital. Because many low-to-moderate income individuals do not have the collateral or credit history to qualify for traditional financing through a bank, their loan options can be quite limited, preventing them from being able to start or expand their businesses. Microloans provide access to crucial capitol to begin a business or support an existing one.
Serena Allen of Greenville, Michigan, first became interested in the bridal industry after helping to plan a wedding with a friend back in 2012. At the time, she was working as a teacher and going to school to pursue her master’s degree, but she continued to dream of opening her own bridal shop, spending her spare time developing the idea and working on a business plan. Eventually, she decided it was time to move forward. The process was not without problems, however. “My greatest challenge,” she said, “was financing. I was turned down by several banks because I did not have enough collateral to put up for the loan.”
With a microloan from GROW, Serena Allen has now joined the ranks of thousands of individuals whose entrepreneurial goals have been achieved in part through microlending. She opened Forever Yours Bridal in 2015 and is now living her dream of business ownership. But it’s not just the money that helps. Effective microlending also depends on strong relationships -- with the customers, and with the communities they serve.
First of all, people can only take advantage of microloans if they know about them. So microlenders can increase their scope by collaborating with other community organizations to identify business owners who could benefit from microloans, especially those individuals who fall in the low-to-moderate income category.
The loan itself is only the first step. The success of GROW’s program, for instance, relies heavily on the wraparound services it provides to all of its borrowers. For example, borrowers have free access to classes and workshops on topics ranging from QuickBooks to marketing to insurance. In addition, borrowers receive regular check-ins from GROW staff to ensure that their businesses have the resources and support they need to succeed. And mentors in various fields -- marketing, finance, human resources, and more -- are available to borrowers who need one-on-one assistance.
One of the most remarkable aspects of microlending is a generally excellent loan repayment rate. For GROW, it’s near 95%, in part because of the close connection that they maintain with their borrowers -- something most traditional lending institutions cannot do.
Does microlending remove all of the barriers for aspiring entrepreneurs? Certainly not. But it is a creative, local way for a community to empower all of its citizens, regardless of socioeconomic status, to pursue their entrepreneurial dreams.
Bonnie Nawara is CEO of Grand Rapids Opportunities for Women.
The Next Idea is Michigan Radio’s project devoted to new innovations and ideas that will change our state.