[As part of an ongoing series on small business finance, I present the first Company Spotlight. I’ll highlight various individuals and organizations helping meet the financial needs of small businesses and entrepreneurs]
Accion is a microfinance organization whose goal is to empower business owners by granting access to working capital as well as financial education. Particularly since 1991 Accion focuses on serving small business owners in the United States who cannot borrow from banks due to the type of business they’ve established, operating for too short a period, or having insufficient credit history. I recently sat down with Erica Dorn, Manager of Lending for Accion East in their Maiden Lane offices here in NYC to discuss how Accion works with small business owners and what owners can do to make themselves more attractive to lenders. The following is a summary of our meeting:
Accion’s International’s Mission is to give people the financial tools they need to improve their lives. This supports its Vision of helping to build a financially inclusive world with economic opportunity for all. Tell us how the organization started. You originally focused on MFIs (Micro Finance Institutions), right?
Erica Dorn: Accion started 50 years ago in Latin America – internationally we expanded to be an investor in microfinance. However, in the U.S. it’s a different model. We lend directly to micro-entrepreneurs; we are the MFI. We’ve been in New York for 20 years.
How would you describe your target market here in the U.S., and is your focus a little different here in New York?
Erica: In the last 20 years Accion East has lent over $180 Million in average $8,000 increments. The fact that we lend from $500 to $50,000 allows us to lend to entrepreneurs that generally have fewer than 5 employees. So from a big scope we lend to those micro-enterprises. Within that scope, we lend to any business that can’t access bank financing, and generally their needs are within the $10,000 range. I would say our “sweet spot” lies between $5,000 – $25,000.
As an example, last month (January 2014) I gave a loan to an immigrant from Ghana that started a beverage company. He wanted to install slushy machines in bodegas so that they serve more smoothies. Because he has no credit history, it’s difficult for him to get financing through the bank. Therefore he didn’t have the capital to get his first machine even though he spent time on his business plan, had a second source of income – he basically was in a good situation. He wasn’t jumping off a cliff into entrepreneurship, but was tip-toeing into it. So, despite the fact he had no credit history and was zero months in business, we were able to do a $2,500 loan to help him buy his first machine. So we take those risks that banks aren’t able to.
On the other end of the credit continuum that we work with is a small retail business, a year in operation, really growing fast, and may have a quarter million in revenue, but they still don’t have those two years of profitable tax returns that banks want to see. Because every entrepreneur is different, they may have a strong credit score but little credit experience, which means it’s hard to get a loan from a bank or even a line of credit. Accion gave a $10,000 loan to a company called Brooklyn Home Brew where the two owners were less than a year in operation. That loan enabled them to boost their credit score, and obviously helped them increase their sales as a loan should. That led to them getting a larger low-interest loan from the bank six months later. So we work with businesses trying to bridge them into financial inclusion, and we help them get bank financing eventually.
Kerwyn: I can attest to that. You helped one of my customers with a loan. They’re a small bottled water company providing alkaline ionized water, going head-to-head with the larger companies like Poland Spring. The loan helped them expand their operations and now they’re looking forward to moving into a new home. Accion was an integral part of that growth.
Erica: That’s a great example. I was mentioning two beverage companies, and food/beverage represents about 20% of our portfolio. Another 20% comes from service companies such as massage therapists, acupuncturists, even dentists, doctors and lawyers. Then retail represents a huge sector, such as fashion; a lot of fashion businesses are common clients. And then we serve anything and everything in between. If a business can be run from home, that’s also a lower barrier to lending. So, we work with any business that can’t get bank financing.
Since you’ve worked with so many businesses over the years, what are some of the biggest challenges you’ve noticed small to medium-sized businesses face with which you can help?
In terms of accessing capital, the challenges stay the same – and have remained the same for the last 20 years. Limited credit history, fairly low loan requests (if the loan request is less than $250,000 banks typically won’t consider it), under-reporting on taxes (this makes it a huge challenge getting larger financing dollar amounts), and informal documentation. For immigrant businesses especially is documentation a challenge. If we can’t prove cash flow it’s really hard to underwrite a loan. We’re really flexible though, compared to a bank. If someone walks in with a bag of receipts, we start the process. Often that caps the size of the loan we do. If someone is purely cash based and not depositing those sales, we have a limit – $5,000; we can’t do more. We obviously need them to open a bank account in order to even get a loan, but we deal with a lot of cash based businesses.
One of my questions concerns what a business can do to make itself more attractive to you as a lender, and you mentioned establishing a business bank account and getting their documentation in order. Is there anything else a business can do to make it more – financeable?
Erica: If a client comes to Accion with a half-baked idea, I’ll send them to a SBSC (Small Business Solutions Center) to help them finish thinking through the idea. We’re really meant to serve businesses that are ready for financing. We’re not a business planning organization. So to prepare, it really helps to talk to a free counselor available here in NYC, find a mentor or many mentors, get to know a lot of the people who are working in your industry and learn their pitfalls – listen to their pitfalls. I think a lot of business owners see what they want to see and they don’t listen to anything that [they perceive] might impede their progress.
Kerwyn: I know what you mean. They get blinders on because it’s their baby and they have an idea of where they want to go. They have a “you don’t understand where I’m coming from” mentality, and that sometimes hinders them.
Erica: Which can also make them very entrepreneurial, and that’s exciting but also sometimes the bane of their successful existence. So I suggest that they really tap into the resources available to them as an entrepreneur, and start by being entrepreneurial. Get to know everyone that can benefit you and make some connections. Open a bank account. Go for success early on. A lot of businesses think, “Oh, I won’t start reporting now but later when I grow, I’ll figure it out.” They’re just going to stunt their growth, basically. I would go in with a clear vision of how much you want to earn, do your production, and start from scratch reporting correctly. It’s ultimately going to lead you to the best outcome.
You touched on many of the things that would prevent a business from receiving financing. Is there anything else you can add to that list?
Erica: The elephant in the room this whole time has been credit score. We talked about it a little bit, but the number one challenge is credit score. A lot of people ignore their credit scores. I’m not saying everyone, but it’s common. A lot of people do pay attention, so it’s great. But it’s frequent where I see people who sort of avoid things that are happening on their credit history. I had a client who had a great business but we couldn’t fund her because 6 years ago she racked up credit card debt and vowed never to pay it. She’s totally past that phase of her life, but it’s there and it’s not going to go away. So check your credit score and know what’s going on. Try not to avoid it. Don’t be in denial.
Kerwyn: That’s good for a lot of other reasons, with the prevalence of Identity Theft. One of the first places you’ll find things is on your credit report. Not everything appears there, but it’s a good first step. That can really mess up a business or an individual’s chances of securing funding.
Let’s bring things down to New York, because it’s a different beast. With New York specifically, what are some things that businesses here need to know in order to work with you?
Erica: First of all, don’t be afraid to pick up the phone Accion. We are always available to have a 10-minute conversation to start with someone. We like to fire off some quick questions and just get to the point so we can all get on with the next steps. Often people think, “Oh, I was going to call…” We’ve got to hustle in this city. So I would say call us at 646-833-4556 or email Kevin McLoughlin, Number 1. Number 2 would be, beyond the challenges, there’s just so much available to you in NYC. You have everything you need – and beyond – in resources here. I think the biggest challenge is always going to be getting capital, but beyond Accion there are a lot of resources. So even if I can’t help you, we’ll refer you to an organization that can. Because we have a 20-year lending history, we have an incredible network that we can connect our clients with. Obviously, when you come to us you get access to our events, which is very exciting. We have a partnership with Tory Burch Foundation. We have a partnership with Sam Adams. We do events with corporations like Groupon and other resources to help educate small business owners about growing their businesses. For example, with the Tory Burch Foundation we do events where we match the CEO of J. Crew with clients to coach them in short sessions. Russell Simmons was at an event, as was Bobbi Brown the makeup artist. So we actually do have some high-profile connections that can help businesses.
Working with Accion is as easy as it is enjoyable. With a dedicated team of professionals like Erica, you can get your funding request started with a simple phone call. If you’re serious about expanding, have a plan in place on how to use financing to accomplish your goals, yet have trouble securing a loan from banks, definitely give them a call.