MicroLoans for Rural Entrepreneurs?
By Mark Edelman and Barry Flinchbaugh
© Copyright Agri-Pulse Communications, Inc.
ME. A few weeks ago, I was asked to make a presentation on “20 Practical Ways to Access Capital” at the Iowa Immigrant Entrepreneurs Summit in Des Moines. There were 575 participants who originally came from all over the globe. One can imagine the added barriers faced by immigrant entrepreneurs while starting a business. Surprisingly rates of entrepreneurial activity for immigrants are double the 11% entrepreneurship rate for other adults. Workshops on business planning, marketing, and legal aspects of starting a business were provided, as well as, celebration of awards for immigrant entrepreneurs who built successful companies and those who mentored and championed their efforts.
BF. Many communities in rural states have experienced a rapid increase in immigrant new resident populations over the past couple of decades. Much of the increase was associated with labor in agricultural sectors such as fruits and vegetables, wheat harvest, meat packing, large hog confinements, cattle feedyards, and more recently large dairy operations. But also many first generation residents have become an important part of crews for construction trades, started ethnic food restaurants, and other rural businesses.
ME. Yes. However it was interesting to note that one Award went to an immigrant doctor who came from India. After spending time in the United States, he founded the Iowa Blood and Cancer Care clinic in Cedar Rapids. He also organized a foundation to help patients fill in gaps in their insurance. A second award went to co-founders of CDM, a distribution company with 13 employees. CDM operates in six Midwestern states and provides 200 Latino customers and supermarkets with South and Central American products. The co-founders are South Americans--one has a business degree and is 20 years older than the other systems engineer.
BF. So tell me how does an agricultural economist who directs a university-based Community Vitality Center (CVC) focused on outreach to rural communities end up as a speaker at an immigrant entrepreneur conference in metro Des Moines? Why aren't you out there focusing your attention to farmers, rural businesses, rural entrepreneurs, and rural community leaders and citizens to enhance their economic vitality?
ME. Barry, not all the demand for knowledge is in rural America and sometimes rural and urban can learn from each other. In 2006, the center that I manage was involved in a statewide initiative to identify gaps in access to entrepreneurial capital. Iowa has 16 Small Business Development Centers (SBDCs) across the state and several SBDC directors were saying small entrepreneurs who were developing good business plans were not able to access conventional financing. So we formed a statewide steering committee including bankers and entrepreneurial technical assistance providers. We conducted interviews and surveyed bankers. We found gaps for entrepreneurs seeking loans of less than $50,000 and in some situations up to $250,000 for unique enterprises. There was also a disconnect between entrepreneurs and area technical assistance networks. If anything, the gaps increased since the 2008 recession as unemployment created more necessity entrepreneurs and bank underwriting standards rose requiring more equity.
BF. Most rural communities have access to local revolving loan funds from USDA and other federal agencies--often at below-market rates. SBA and USDA both work with banks to mitigate risks. Rural utility coops, local chambers, development corporations, and regional nonprofit agencies can access a wide variety of programs to provide access to capital. So did you find that another program was needed?
ME. Yes and No. Not all rural communities are the same. You are right that many rural communities have good programs that assist small business entrepreneurs. However, others don't. We did find a program providing a second look at business plans from small business entrepreneurs after being denied conventional financing. Since 1993, Siouxland Economic Development Corporation operated the SBA MicroLoan program. However, Siouxland's mission was to serve 6 Northwest Iowa counties. So in 2008, the ISU Community Vitality Center collaborated with Siouxland and SBA to organize a statewide foundation called Iowa MicroLoan to serve entrepreneurs in the rest of Iowa. In this case, we found an effective metro program that could serve rural entrepreneur needs.
BF. Historically, the Farmers Home Administration (FmHA) was called the lender of last resort because it took on entrepreneurial debt that did not meet conventional financing underwriting criteria. In 1994, USDA reorganization split the portfolio of FmHA with farmer programs going to Farm Service Agency (FSA) and business, utility, community, and rural housing programs going to the Rural Development (RD). This past year, FSA created a Microloan (ML) Program as a direct loan program with sub-prime interest rates. It is to target beginning, niche, specialty crops, local food producers, and small family operations. Hasn't USDA Rural Development created a microloan program?
ME. Yes, USDA-RD's program was created in the 2008 Farm Bill and is called the Rural Micro-entrepreneur Assistance Program (RMAP). Unlike FSA, RMAP is not a direct loan program with below market rates. RMAP requires an approved intermediary. Iowa MicroLoan became an RMAP intermediary provider in addition SBA Microloans. RMAP funding has had a rocky start but over time it could prove to be as successful as the SBA program. Since lending started in 2009, Iowa Microloan has approved over 75 SBA Microloans of $5,000 to $50,000 to entrepreneurs unable to access conventional loans. Loans have a 6 year term at 7 1/2 to 8 1/8 APR. Both programs are unique because of the technical assistance coaching provided during the loan. Quarterly coaching visits are made to each entrepreneur to review financials and discuss emerging issues before they become unsolveable problems. Iowa Microloan's clients are half metro and half rural; half existing business and half startup. Half the owners are men, half are women. Minorities and persons with disabilities are proportional to population.
BF. Sounds like collaboration filled a gap and solved a problem. But is it sustainable?
ME. In startup, Iowa MicroLoan required grants from Northwest Area Foundation, the Community Foundation of Greater Des Moines, and USDA, plus assistance from ISU and volunteers statewide. It survives on margin by borrowing agency funds at low-interest rates and relending to clients at above-bank rates. Annual SBA and USDA grants and matches from private sources are required for technical assistance and operations. Discussions about leveraging state funds and bank contributions for community reinvestment compliance are occurring because Iowa Microloan graduates bankable clients back to conventional lenders.
* Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas State University.