Introduction to Microenterprise Development

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Introduction to Microenterprise Development
Elizabeth Wilson, Senior Director
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Introduction

• In summoning people to match their talent and
  labor with small amounts of credit,
  micro-enterprise development meets low-income
  communities where they are, introducing new
  opportunities to create work, income and assets,
  and thereby affirming human worth and dignity.
• Jack Litzenberg, Charles Stewart Mott Foundation
• There is nothing better than being charge and
  responsible for your own future.
• Jenny Smith, Drain Wizard, Cedar Rapids, Iowa

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900 Introduction to Microenterprise, New
Directions, Challenges to the Field
1030 Break 10 20 Program Design for 2009,
Client characteristics, Marketing 1200 Lunch 100
Training and TA, Pew Practices in Client
Curriculum Development 200 Microlending,
Microfinance, Microequity 300 Break 320 Funding,
Technology Support Services for MDOs,
Opportunities in the Stimulus Package for
MDOs 400 Evaluation Services, Microtest 430 QA
and Wrap up 500 Adjourn
Agenda
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AEOs Mission

• AEO supports the development of strong
  effective U.S. MDOs to assist underserved
  entrepreneurs in starting, stabilizing,
  expanding businesses.

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AEOs Vision

• Underserved microentrepreneurs will have
  successful businesses, which will create wealth,
  assets and economic well-being for them and their
  families, resulting in healthy connected
  communities.

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AEO Organizational Capacity

• In-Depth Knowledge of the Industry
• Commitment to Low-Income Entrepreneurs
• Comprehensive Training and Education
• Effective Advocacy Research
• Special Public-Private Partnerships to Strengthen
  the Industry

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What is Microenterprise Development?

• An income generating strategy that helps low
  income people start or expand very small
  businesses

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Success Story Noahs Art
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Success Story Noahs Art

• Digitally combining photographs and rough
  geometric shapes, called fractals, Noah Trembly
  creates and sells original digital artwork.
  Noahs father, a jewelry design artist,
  introduced him to painting and drawing as a boy,
  but Noah was more drawn to computers and the
  digital world of graphics.
• Early on, computers and technology became both a
  necessity and a blessing for Noah. Born with
  cerebral palsy, Noah is quadriplegic and mute,
  but technology has enabled him to unlock the full
  potential of his artistic creativity. Noah
  speaks using an electronic device that looks like
  a cross between a laptop computer and an
  old-fashioned compact telephone switchboard. He
  looks at a key or a phrase on the device and,
  after a few seconds, the device emits an audible
  voice.
• On the computer, Noahs talents truly shine. He
  began studying graphic design in 1995 and
  continues to keep pace with the latest software
  and design techniques by attending workshops and
  seminars. In the graphic design world today
  computers are the mainstream. This makes it
  possible for people with disabilities to work in
  graphic design. I mean, sitting in front of a
  computer all day is perfect for me, says Noah.
• After working for a while in the graphic design
  and web development fields, Noah decided to
  dedicate himself to his art fulltime. Since 2004
  he has worked as an independent artist, promoting
  his work online and at regional art shows. In
  2008, Noah joined Art of Ohio, a networking and
  marketing community for select Ohio artists. Art
  of Ohio is supported by the Ohio Arts Council
  (OAC) and the Appalachian Center for Economic
  Networks (ACE Net). Through ACE Net, Noah was
  chosen to receive a 1,600 eBay Foundation
  Techquity award. Noah used that award and 400
  of his own money to purchase a new computer with
  additional memory for his artwork and graphic
  software.
• With the help of ACE Net and Art of Ohio, Noah
  has been able to better focus on his target
  market. He has gotten his name out in the
  community and been able to network with other
  local artists. This year, he was part of Art of
  Ohios exhibit at Ohio Universitys Multicultural
  Gallery. Two local newspapers have since written
  articles on Noahs work and his involvement with
  Art of Ohio. The eBay Techquity award has
  allowed Noah to stay on the cutting edge by
  running the latest software programs and staying
  connected to the world. Todays computer world
  has given me a gift the opportunity to convey
  my inner soul to humanity. In my world, art and
  technology are one. They blend together to form a
  new level of artistic expression. And, my
  website gives the world a link to me

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How MED Helps People

• Creates income, assets and fulfills personal and
  family needs of microentrepreneurs.
• Contributes to employment creation and local
  economic development.
• Helps the poor work their way out of poverty,
  fulfill their dreams, contribute to their
  community.

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What are the roots of the MED field in the U.S.?

• MED programs appeared in the mid-1980s as
  response to the changing structure of the economy
  the failure of traditional business assistance
  financial institution to respond to specific
  markets.
• Professionals in poverty alleviation
  community-based economic development began to
  consider self-employment programs as one approach
  to help people improve their economic financial
  security.

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What are the roots of the MED field in the U.S.?

• In the late 1980s the Corporation for Enterprise
  Development (CFED) a national organization that
  promotes asset-building economic opportunity
  strategies, primarily in low-income distressed
  communities, led the effort to create a national
  self-employment demonstration project.
• CFED operated the Self-Employment Investment
  Demonstration (SEID) from 1988 to 1992, testing
  self-employment as a self-sufficiency strategy
  for welfare recipients. Also, the U.S.
  Department of Labor initiated demonstrated
  projects in the states of Washington and
  Massachusetts.

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What is a Microenterprise ?

• A sole proprietorship, partnership, or family
  business that has fewer than five employees.
• Small enough to benefit from loans under 35,000.
• Too small or otherwise unable to access
  commercial banking services.

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What is a Microenterprise ?

• Retailers
• craft shops, florists, used clothing stores
• Service suppliers
• hairdressers, caterers, graphic design
• Manufacturers
• carpenters, craft artisans, bakers

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Profile of a person served by a microenterprise
program

• Working poor
• People caring for families
• People with disabilities
• Public assistance recipients
• Immigrants and refugees
• Recently unemployed

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ME Client Profile

• 78 women
• 42 African American
• 81 with no college degree
• 47 with business sales under 1,000 per month
• Median income of 26,227 for poor and non-poor
  clients

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Who Provides MED Services?

• Microenterprise development agencies
• Traditional business development agencies
• Community economic development organizations
• Employment training organizations
• Human services and faith based agencies
• Target group focused organizations

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Success Story The Vintage Shoppe
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Success Story The Vintage Shoppe

• Gretchen Gentsch started the vintage Shoppe as
  an offshoot of the Extend the Dream Foundation in
  October of 2006. Gretchen Gentsch, who suffers
  from depression, became a member and client of
  Extend the Dream Foundation prior to launching
  her business. She became affiliated with the
  organization, as they were a pioneering group in
  the initiative of helping individuals who are
  handicapped become business owners. She at first
  operated a clothing store and later decided to
  fulfill a long-standing dream of hers by
  branching off into selling antiques. However, she
  had no prior knowledge of how to attain or market
  her products. Through use of the HP equipment and
  the training offered, she said she got a more
  practical understanding of technology and gained
  tremendous knowledge in matters relating to the
  acquisition and marketing of antique products.
  She made special mention of a training done on
  utilizing the marketing tool EBay, which she
  found extremely helpful. Through the help she has
  gotten from Extend the Dream Foundation and her
  various successes she said she his happy and
  since opening her business she has not had a
  relapse of any depressive spell. She left with
  these words of advice and encouragement for
  anyone seeking to become an Entrepreneur Reach
  into the community around you and get their
  support, but also think self sufficient have
  belief and be happy with what you created.

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MED Program Goals
Business Development
Poverty Alleviation
Employment Creation
Empowerment
Community Economic Development
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MED Program Profile

• Average operating budget 378,781
• Staff 4.1 full-time staff members.
• Target Market poverty alleviation is a primary
  goal for most programs 70 report that gt 50 of
  their clients household income was lt 80 of the
  HUD median income for their location.
• Gender Fully 62 of the programs had a client
  base of more than 50 women.
• Persons of Color Fully 45 of the programs had a
  client base of more than 50 persons of color.

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MED Program Profile

• Client load On average, programs serve 362
  participants, including 175 clients who received
  more significant levels of service. Programs
  make an average of 50 loans.
• Capital
• The average capital available per agency was
  595,492. Loan sizes are from 15,000-25,000
• The average outstanding portfolio was 341,025.
  and 57 of total loan capital was outstanding to
  borrowers during FY 2002.

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MED Program Profile

• Technical Assistance the average number of
  clients served is 161 and the average number of
  hours of assistance is 14.
• Business Training the average number of clients
  served was 156 and the average number of hours of
  training was 43.

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What products services do MED programs
typically offer?

• Training Technical assistance to help
  microentrepreneurs develop the skills they need
  to plan, market, manage their own business.
  Typical curricula also include basic business
  financing and personal effectiveness
  (communication skills, time management and goal
  setting).

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Typical Skills Expected to be Learned by Clients
of MED

• Define and clarify the business vision
• Identify the target market
• Identify and assess competition
• Develop a pricing strategy
• Develop a marketing strategy and plan
• Develop a sales technique
• Develop sales and production cycles
• Establish recordkeeping procedures

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Typical Skills Expected to be Learned by Clients
of MED

• Analyze business costs and make a budget
• Make cash flow projections
• Use break even analysis
• Understand basic financial statements
• Research and seek financing and funding
• Computers QuickBooks, Windows, Internet,
• e-commerce
• Access community resources and referrals
• Understand manage regulatory/ legal aspects
• Understand and manage risks

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Fast Facts About Training and Technical Assistance

• Substantial numbers of low-income individuals
  start, stabilize and expand their businesses
  within 18 months of completing training. At four
  programs studied by Aspen, ownership increased by
  an average of 49 percent among those who entered
  training prior to business start-up.

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What Matters

• Readiness for business
• Financial skills development
• Training styles
• Training markers
• Ongoing support services

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Microlending

• Capital in the form of individual or peer group
  loans from in-house loan funds or from
  collaborating banks provides disadvantaged
  entrepreneurs with financing for their businesses
  in affordable amounts and terms. Loans range from
  500 to 25,000.

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Success Story Big Cool
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Challenges of Micro-Lending

• Microloans are small so the economics of lending
  require keeping the costs of analyzing, approving
  and administering loans low and maximizing
  interest and fee income to help cover those costs
• Microloans are risky because borrowers have
  limited cash savings to make payments when cash
  flow from the business doesnt materialize and
  few assets to use as collateral (a secondary
  source of repayment).

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Challenges of Micro-Lending

• Microlenders are different from traditional
  finance institutions in several ways
• Clients are low-income
• The methodology is characters and cash flow based
  rather than collateral-based lending
• The portfolio is made up of many loans of small
  size, short maturities, and more volatile
  delinquency.

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Common Pitfalls of New Programs

• Lack of standardized lending policies and
  underwriting guidelines, resulting in poor loan
  quality and high costs per loan.
• Over-emphasis on character-lending and not enough
  focus on business cash flow
• Insufficient focus on collections procedure
  resulting in high delinquency rates and
• Inadequate information on portfolio quality and
  poor risk management.

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Success Story www.momswithspecialneeds.com

• Kathy

George
Foster
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Success Story www.momswithspecialneeds.com

• Kathy R Foster Holmes-Bass is the founder of this
  company, www.momswithspecialneeds.com.  At the
  age  of 30, she lost her vision overnight to a
  severe bout of meningitis and encephalitis. At
  the time of this occurrence, in 1996, Kathy's
  older child George Bass was 3 years 10 days old
  and her younger child Foster Bass was two months
  two days old. Eight years later, in 2004, Kathy's
  life has been a journey of challenges,
  opportunities, laughs, and smiles. Since the loss
  of her sight, Kathy has been featured on a PBS
  documentary (1999). In 1999, Kathy was also hired
  blind as a adjunct faculty member where she
  taught a upper-division social work course to
  sighted students at a major university. After
  extensive rehabilitation training, Kathy was
  accepted and enrolled in a PhD program at Georgia
  Institute of Technology in Atlanta, Georgia. She
  has successfully completed all her coursework in
  the School of Public Policy at the university and
  is currently working on her dissertation research
  in the area of Micro enterprises.

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Step-by-Step Functions

• Understand your clients and their need for
  credit.
• Design loan products that meet their needs and
  acceptable risk as a lender.

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Step-by-Step Functions

• Make Good Loans
• -- Develop clear loan policies and underwriting
  guidelines
• -- Screen applicants carefully and design a
  good loan application
• -- Assess loan applications to understand the
  borrower and the business
• -- Review/approve loans
• -- Close and disburse loans

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Step-by-Step Functions

• Manage the loan fund prudently
• Periodically review program outcomes and
  efficiency and revise and modify for improvement.

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CASE STUDY

• Toni of Tonis Touch of Class Florist has
  completed your organizations Entrepreneurial
  Training Program and has come to your loan
  review committee in January for an 8000 loan to
  expand her business. She is requesting the funds
  for inventory and flowers for Valentines Day.
  She has just signed on with the Teleflora wire
  service and she expects to double her sales this
  season. She grosses 80,000/year and has one
  part-time floral designer. She recently moved
  her business from a flea market to a storefront
  and had a 3 year lease. Personally, she has gone
  through many difficulties and a divorce which
  caused her to file bankruptcy two years ago. She
  has a business plan, but no financial statements.
  She also has several corporate customers who
  have provided her with letters of recommendation.
  
• Would your committee give Toni a loan? If so,
  why? If not, why?

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Additional Service Economic Literacy and
Financial Education

• Many practitioners also offer financial education
  training and counseling to help clients
• Reach immediate financial goals
• Become long-term savers and asset owners
• Plan for their financial future well-being
• Make effective financial management decisions

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Funding MED Programs
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Funding Sources
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The Stimulus Package

• Zero capital gains rate for small business -
  Obama will eliminate all capital gains taxes on
  investments made in small and start-up
  businesses. Unlike McCain, who wants to give 200
  billion in new tax cuts to the largest and most
  profitable businesses, Obama wants to cut taxes
  for the small businesses that create jobs.

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The Stimulus Package

• Temporary tax incentives to encourage investment
  in jobs -Obama will give small businesses
  additional incentive to make investments and
  start creating jobs again by providing temporary
  business tax incentives through 2009. This will
  be accomplished, in part, by the extension of IRS
  code section 179 expense deduction to 250,000
  which now expires in December 2008.

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The Stimulus Package

• New tax credits for employee health care costs -
  The Obama Small Business Health Tax Credit will
  provide a refundable credit of up to 50 on
  premiums paid by small businesses on behalf of
  their employees and to small businesses with no
  employees.
• Opportunity Never has the industry been in a
  better time and place.
• Microenterprise is being seen as an economic tool
  for businesses and the community as well as for
  the individual.
• 2) Incoming administration vs. the outgoing
  administration.
• Opportunity The outgoing administration was
  hostile towards the field, attempting to
  eliminate programs specifically deigned by the
  field, and making significant reductions on other
  programs. The new administration is favorable
  towards the field, what we do, who we serve, how
  we can do it better and for more individuals and
  communities.
• We must focus on program efficiency, be results
  orientated, and gather and share our data so that
  the programs are proven to be a good investment
  for federal dollars

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The Stimulus Package

• 3) Congress
• Opportunity On the verge of program
  eliminations we have instead been able to
  maintain and in some cased grow the support and
  resources for federal programs.
• Including PRIME, SBA microloan and the Womens
  business Center, and CDFI
• 4) Other
• CDFI Stimulus request, and is also supporting the
  Rural Economic Development Councils request for
  funding through the Farm bill at 21 million.

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Does Microenterprise work? What has the
microenterprise industry achieved?

• The short answer is yes the strategy does
  work. Microenterprise development is a
  cost-effective strategy for helping a specific
  niche of low-income people stabilize and increase
  income and assets, create jobs in local
  communities, reduce dependency on public
  assistance, and more fully realize their personal
  and professional potential.

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Fast Facts About Business Ownership

• In a longitudinal study of low-income
  entrepreneurs, the survival rate of micro
  businesses after five years was 49 - comparable
  to the survival rate for businesses with similar
  characteristics owners.
• More than half - 53 percent - of the poor
  entrepreneurs in that study had household gains
  large enough to move out of poverty. For those
  individuals, their move over the poverty line was
  an economic change of huge magnitude in most
  households, family income nearly doubled over the
  five-year study period.

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Empowerment Community Development

• Increased self-esteem, control over key life
  decisions, sense of security, support networks,
  skills.
• Increased community networks, economic activity
  in communities, security, image

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Cost-Effective Job Creation Economic
Development

• Estimated cost of job created with MED support
  4,114 - 6,155 (comparable or slightly higher
  than JTPA)
• Estimated for every 1 invested in MED returns
  2.5 (income for owners employees, asset
  growth, reduction in public assistance,
  unemployment insurance costs, increased tax
  revenues.

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What is Microtest?

• MicroTest is a management tool that empowers
  microenterprise practitioners to gauge and
  improve the performance of their program and the
  outcomes of their clients.
• The MicroTest performance framework, developed
  through a collaborative effort with industry
  practitioners since 1997, has been used by more
  than 70 microenterprise organizations.
• Through funding from JPMorgan Chase, Microtest
  will include many agencies from NYS

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What is Microtest?

• MicroTest is a reporting system that recognizes
  the full range of ME services provides data on
  client demographics, scale, credit training
  program effectiveness, sustainability.
• By embracing MicroTest as a reporting instrument
  for grantee programs, funders receive high
  quality performance data that both responds to
  their needs provides useful management
  information for the programs they support.

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What does MicroTest tell us about Performance?

• The 10 most prolific lenders made loans between
  4-5,200 the average cost per loan is 2,726
  (overall average is 6,329).
• In 2000, the median graduation rate was 79 and
  57 of enrollees completed business plans.
• Top performers had rates that exceeded 88.

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What does MicroTest tell us about Performance?

• Top 1/5 of MT lenders have Total Portfolio at
  Risk rates below 3.1 And 40 have PAR below 2.2
  (average is 15 for training-led 20 for
  credit-led).
• Cost per client Average is 3,529 58 are below
  2,500 76 are below 3,500
• Cost per loan top performers are under 1,500.
  60 have cost per loan below 5,000 40 are
  below 3,000
• Cost/business training/TA 60 spend less than
  1,773 per client and the most effective spent
  less than 763 per client.

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Challenges Opportunities Facing the Industry

• From the Report of the
• National Microenterprise Strategy Project

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Challenges

• External Funding Competition
• Changes in public finance
• Competition from financial institutions
• Need for industry-endorsed measurements
  standards to foster quality high performance

• High costs and inefficient delivery methods.
• Limited practitioner education, training and
  technical assistance.
• Narrow range of products offered.
• Insufficient scale and market share

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Opportunities

• New and expanded markets for microenterprise
• Awareness of entrepreneurship as a public good.
• Expanded public information

• The emergence of SMAs
• Technology
• Maturation of the field

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Recommendations

• Support Adopt MicroTest Performance Measures
  Industry-wide.
• Develop Quality Standards an Accreditation
  Process.
• Provide Education and Technical Assistance in
  Market Diversification Strategies, New Product
  Development Capacity Building.
• Develop and build the capacity of SMAs
• Strengthen Expand Advocacy Efforts.

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Wrap Up, Evaluations, Test!

• Shop Until You Drop
• At the Micro Marketplace

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Contact Information

• Elizabeth Wilson
• ewilson_at_microenterprisematters.org
• 404-344-2601
• Thank you!