Here in Albuquerque, we know we are at a defining moment where disruptive innovation can mean the difference between a thriving and dynamic city, or one that stagnates and declines in population, vibrancy and economics. Cognizant that Albuquerque must “grow our own” entrepreneurs, we knew that these entrepreneurs needed access to capital rise to the next level. As part of our planning year for The Integration Initiative (TII), a working group made up of stakeholders from banks, credit unions and microlenders, along with other community leaders, focused on understanding how entrepreneurs access capital and mapped barriers to entrepreneurial success for historically marginalized entrepreneurs – veterans, low-income individuals, women, people of color, English language learners and immigrants.
Access to capital is key for entrepreneurs to start or grow businesses. While the working group determined that capital can be much more than money, it found that lack of access to business funding, loans or investment proved a major barrier. The group found that this obstacle was especially pronounced for English language learners, those with no or bad credit and those with no or insufficient collateral. This barrier was apparent within traditional lenders such as large banks or credit unions, but also with alternative lenders such as non-profit micro-lenders, community banks or community development financial institutions (CDFI) which have lower credit requirements but still require collateral.
We need a solution both locally and nationally. A key driver to unlocking economic mobility is access to funding to start and grow a business. In Albuquerque, with a population nearing 700,000 residents, 31% of households speak a language other than English. The average credit score ranks in the bottom 13% nationally (Experian, 2014). At the national level, approximately 38% of the adult U.S. population have credit files rated as poor or below or do not have a credit agency rating which means they cannot readily receive personal or business credit.
Lack of Credit
38% The percentage of the adult U.S. population who have credit files rated as poor or below or do not have a credit agency rating.
Entrepreneurs that fall into any of these categories face barrier after barrier in securing capital to start or expand their businesses. And even if they are approved, they face unfavorable financing terms that further jeopardize their ability to compete in the financial mainstream. This happens for a variety of reasons, but typically results from a lack of understanding on how to navigate financial systems, low credit-worthiness and a culture that downplays calculated risk-taking.
Business conditions in this climate have deteriorated due to the curtailing of access to capital. The conservative lending atmosphere is protecting banks, while crushing individuals and entrepreneurs. Closing the doors to credit for all individuals with low scores does not constitute a sound strategy for a healthy economy. In some cases, this leads individuals who desperately want to start or grow a business into the grips of predatory lending.
These businesses are the lifeblood of many families and the communities where they live. Success of these businesses directly correlates to lifting these families out of poverty, providing jobs within their communities and creating healthy commerce. When entrepreneurs cannot access capital, it costs jobs and directly affects lives in our communities. It turns a one-time obstacle into a community-wide failure. Unless this model is altered now, the new credit environment will have severe repercussions in our communities for decades.
During the Integration Initiative planning year and the process of asset mapping, our team uncovered that truth. We also discovered that a promising financial product that can meet the needs of these entrepreneurs already exists. This product, called Co-Op Capital, is currently being offered by Nusenda Credit Union, a local nonprofit credit union and one of our lead partners. Nusenda Credit Union is working with its trusted member organizations, including associations and co-ops, to create a loan program for their affiliates. The member organization collateralizes a low interest loan through its credit union deposit account and the credit union provides the origination, servicing and positive credit reporting. The member organization makes the determination on whether to make the loan. Credit reports are not required, instead trusted relationships empower the loan decision and the responsibility to pay back the loan.
Take the example of La Montañita:
A co-op market called La Montañita in New Mexico partners with Nusenda Credit Union to provide this co-op capital product. La Montañita sponsors loan applications of one-, three- and five-year terms for its affiliates. With the assistance of the credit union, this co-op market helps its producer-suppliers grow their own businesses by providing the funds they need for expansion. For instance, the co-op identifies a honey producer that supplies a high-demand product, which consistently sells out in the market. The honey producer, however, cannot produce more because it might take another employee or a new piece of equipment to increase production. Without sufficient funds to do so, the honey producer would have the option to go to a bank, credit union, or alternative lender; however, if that producer is seen as a risky investment (no credit, no collateral, no business plan, etc.), the loan would be denied. Instead, the honey producer could apply for a loan through the co-op market, the loan would be originated by the credit union and collateralized by the market’s savings account at the credit union, there is no credit report needed, and the honey producer gets flexible terms to repay the loan. The credit union reports positive credit for the honey producer, the honey producer benefits from increased production and sales, and the co-op market can meet consumer demand for the product. It’s a win-win-win.
The product—and the approach to its implementation–challenges the traditional models of lending. The member organization benefits from a stronger affiliate and the affiliate is able to overcome barriers to business lending. We believe that if this model is adapted and brought to scale, it can serve as a model to broaden access points for entrepreneurs facing high barriers to capital.
Nusenda has piloted the approach with two other business loan partners in addition to La Montañita: a film technicians union and concrete contractor. The credit union has made over 200 of these loans to their members, totaling more than $400,000. Among workforce partners, the delinquency rate is less than 1%. Because the member organization approves the loan based on its own deposits, and sets the terms, the financial product does not saddle business owners with loans that are beyond the needs or capacity of their affiliate. The product works because it relies on integrity, determination and trust.
While the idea of micro-lending is not new, the foresight to offer these loans through member organizations over lending institutions is largely untried. Leveraging familiar co-ops, associations, unions and other partners as the “face” of the product decreases borrower wariness and increases repayment. As a result, many entrepreneurs feel rewarded for their tenacity and grit. They receive the capital they need to grow their businesses, receive positive credit reporting and increase their personal income. Nusenda is also seeking to embed financial capability training into the financial product (as well as other Albuquerque TII strategies).
We want to challenge the Albuquerque TII and its partners to adopt a new construct for financial products and services that do not rely on the “5 Cs of Credit” (character, capacity, capital, collateral, conditions) through the support of CDFIs, and instead deliver credit to marginalized populations without burdening the system. The team in Albuquerque believes that the Co-Op Capital product has the power to transform lives and change educational achievement, small business development outcomes and economic mobility of vulnerable populations. We believe that by fostering a spirit of innovation and entrepreneurship, particularly among our marginalized, people of color, and immigrant communities, Albuquerque’s project will create job growth and economic mobility. All while helping our city reach its full potential as a place to live, work and prosper.