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Microloans and a hand to hold fill gap for startups

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Chant and Amy Singvongsa
Chant Singvongsa at the Wishy Washy Laundromat in Jackson, Minn. Singvongsa and his wife Amy own the laundromat, a landscaping service and is starting a t-shirt printing business. The couple has started the businesses with the help of microlenders such as the Northeast Entrepreneur Fund and the SW Initiative Foundation.
Photo by Jackson Forderer for MPR

JACKSON, Minn.  Chant and Amy Singvongsa are a two-person entrepreneurial storm in the small city of Jackson, in southwestern Minnesota. They run a daycare, a landscaping company and a T-shirt design and printing service, usually doing business at the same bank.

But when they needed a loan to buy the town's Laundromat a year ago for $125,000, the bank said no.

ChantSingvongsa
Chant Singvongsa works on his computer to print out a t-shirt design in his office at the Wishy Washy Laundromat. Singvongsa is starting up the t-shirt printing business with the help of a microloan.
Photo by Jackson Forderer for MPR

"This is the loan officer I've been working with for years," said Chant Singvongsa. "I threw it at him. I said I was interested in buying the Laundromat. He said we couldn't get a 100 percent loan through the bank."

Instead, the bank referred him to the Southwest Initiative Foundation in Hutchinson, which runs one of the largest microloan programs in the state. These loans, which are growing in popularity and tend to be easier to get than bank loans, are usually less than $50,000 and average more like $20,000. Many people think of microlending as the tiny loans given to people in developing countries, but the idea has been scaled up for American businesses. In the 11 years since the foundation started its program, it has doled out more than 200 microloans worth almost $3 million.

One of those, for $35,000, went to the Singvongsas. It served as a seal of approval to the bank, which then agreed to provide the rest of the money. The couple fixed up the Laundromat, painting and adding Wi-Fi, and renamed it "Wishy Washy." Now, it serves as their headquarters, doing well and paying for itself.

"When I start something it's always scary," said 30-year-old Chant Singvongsa, whose parents came from Laos when he was a boy to work at a local farm machinery plant. "Getting approval from others is difficult. A lot of people are scared of starting a business. I enjoy creating it. It's not about the money. It's just about doing it." The former DJ says next he plans to open an Asian foods stand near the Laundromat that his mother would run. 

Fostering entrepreneurism has become a priority across Minnesota. In rural areas, small startups are viewed as a potential foundation for longterm economic growth, especially in an economy that may keep bigger, established companies from moving in and opening a branch or factory. Yet there remain obstacles, such as the availability and expense of commercial space and the difficulty of building a customer base, doubly tough in a sparsely-populated area. Financing is one of the biggest hurdles for new businesses and it can be hard to get money from banks, whether because of tighter lending standards or the fact that property like homes is worth less these days as collateral.

"The banks have gotten so clamped up on things, that (potential borrowers) go in there and even if they have a good business plan, it's almost to the point where you wouldn't need a bank and then they would give you a loan," said Lyle Danielson, economic development director for Long Prairie, who's trying to fill an empty business incubator. "When I was in business, I had a note above my desk that said, 'The banker is someone who will lend you an umbrella on a sunny day and ask for it back when it rains.'"

Banks have never been a real good source for early stage entrepreneurs

Outstanding business bank loans of less than $1 million have declined nationally, from $711 billion in 2008 to $600 billion as of September 2011, according to the U.S. Small Business Administration (SBA). "They are not lending like before," said the report's author, Victoria Williams.

Mark Spriggs, University of St. Thomas
Mark Spriggs, chair of the entrepreneurship department at the University of St. Thomas
Mark Spriggs

In lieu of banks, entrepreneurs seek funding in creative places --  friends and family, the state's various "angel" venture capital networks or services like Kickstarter , which acts as a hybrid popularity contest and public fundraising tool. 

"Honestly, the banks have never been a real good source for early stage entrepreneurs," said Mark Spriggs, chair of the entrepreneurship department at the University of St. Thomas. "Usually, they raise money through their own savings until their assets built up, or from family and friends.

Maybe when credit was real loose you could get money, but even so banks were never financing startups. The only exception was if they were in a small town and they knew the person. They may invest as an economic development strategy for the town." Spriggs considers microloans a good substitute.  Demand is up for microloans, nationally and in Minnesota. And they come from a variety of organizations in the state, such as Southwest Initiative Foundation in  Hutchinson, the Southern Minnesota Initiative Foundation in Owatonna, the Northeast Entrepreneur Fund in Virginia and other sources like St. Cloud State University, the virtual incubator in Red Wing and the Red Wing Port Authority, which in January opened a dedicated small-loan fund for entrepreneurs.

We saw increased activity after the economy faltered

In all, 17 Minnesota organizations made 241 microloans in 2010, according to the Washington, D.C.-based Aspen Institute's  "microTracker" website.  More than half were given to women and nearly half to low-income people. A recent Aspen report showed that the number of loans disbursed nationally increased by 21 percent between 2002 and 2008, and the total value of the loans increased by 51 percent. "This last year we had a record number of loans," said Berny Berger, coordinator of the Southwest Initiative Foundation's microenterprise program. "We saw increased activity after the economy faltered."

While some measures indicated a decline in Minnesota entrepreneurship starting in 2007 or 2008, Berger said a recession can be a good time to start a business. Startup costs can be low, she said. "We had people who were able to buy a business going under because the people before them had overextended themselves." 

"I WOULDN'T DO IT AGAIN"

Jim Lindmeyer, who lives in Hutchinson, was laid off from his job as a corporate buyer in 2009. He'd been ruminating on an invention for years and decided to take advantage of his sudden unemployment. "I had this idea of a lawnmower blade with a replaceable edge," he said. "Just like Gillette, where you put in a new razor blade when the old one gets dull." He received a microloan from Berger's outfit and took out other loans and invested personal money, too. He developed versions of his high-impact plastic blades, which he perfected over time. But so far, the business hasn't paid off. "It was extremely difficult to take something from a piece of paper that had never been done before," Lindmeyer said. "Everyone was looking for this type of product but nobody was providing it." It turned out there were liability concerns. "There was the fear that it would fly off and that it could stick in somebody's eye or leg. I came out of the box a little early."

Lindmeyer repaid the microloan, but still has debt related to his endeavor. "I have $250,000 in this thing so far," he said. He's now working a day job in Minneapolis and hopes one of the big mower companies will partner with him or buy his invention. He says of entrepreneurship, "I wouldn't do it again."

Starting a business is risky. The SBA  estimates that only about half of companies with employees survive past the first five years. Organizations that give microloans seek to improve the odds by providing borrowers with assistance, such as with writing business plans or developing marketing strategies. This process has the added benefit of weeding out some of the more untenable projects. Singvongsa said he received training in QuickBooks with his microloan, for example.

Berger said before her organization will give a loan she tries to look at all the practical angles and a few intangible ones, too. "Do they have some kind of reasonable credit? It's the feasibility of their business plan, including their own personal plan. Do they have outside income while they start up? We look at all the factors. We also look at community factors, and the need for the business. Is there a market because the business is needed or desired?" Providing support after the loan is made has helped keep her organization's default rate to an average of 5.4 percent.

Mary Mathews, president of the Northeast Entrepreneur Fund, said her group gave out 59 microloans worth $890,000 in 2011. The vast majority of the businesses she helps are still around two years later, she said, citing an average default rate of 6.9 percent. "We provide all kinds of additional support to business owner as they grow their businesses," she said. "We're with the entrepreneur for the long haul." Catherine Branville received a $25,000 loan from the Entrepreneur Fund in 2010. The 27-year-old always knew she wanted to own a store, but she wasn't sure what sort it would be. She'd moved with her husband, Gary, from Virginia on the Iron Range, where they both grew up, to the Twin Cities to get her business degree at the University of Minnesota.

Catherine Branville
Catherine Branville always knew she wanted to own a store. Catherine, and her husband Gary, bought Irma's Finland House, a mainstay gift shop in Virginia.
Image courtesy of Catherine Branville

Branville's decision was made for her when Irma's Finland House, a mainstay gift shop in Virginia, came up for sale a year and a half ago for around $60,000. She'd shopped there as a kid and had an attachment to the place.

"We love it on the Iron Range," Branville said. "Both of our families are from here and we knew eventually we wanted to come back this way. We needed the right opportunity and job."  Branville attended a small business financing seminar in Duluth, where she learned about the Entrepreneur Fund's microloan program. The people there walked her through her business plan, helped her tap a city loan fund, and gave her the microloan, which prompted a bank to provide more. "It was huge," she said. "We knew the bank would never have lent us the full amount we needed. Without Northeast we could not have bought the business."

Irma's employs six people part time. "Things are going really well, knock on wood," said Branville. "We're beating all the projections we had for the first couple of years. There is a lot of work to do and a lot of projects on our list. Slowly but surely we're getting there."