Lillia Key was in a bind. For 21 years, she’s run Lenore’s Kitchen, a catering business in the Marquette Park neighborhood. Her company does plenty of work with CPS, the city of Chicago and other public entities that don’t pay until well after she’s completed the contract — sometimes upward of 45 days later.
Waiting for checks had left her strapped. She needed a $15,000 loan to act as a bridge to finance new outlays and pay her five employees until she received the payouts from her city contracts. “I would have been in big trouble. For the last 21 years, I’ve pretty much paid everything out of pocket. Everything’s been put into Lenore’s Kitchen,” she says.
You know the next part of the story. Business owner heads to bank, sits across from sympathetic loan officer, smiles bravely and listens to the rejection. “They were saying [lack of] credit as well as not enough collateral,” Key says.
For Key and other small business owners, getting the time of day from traditional lenders can be difficult, even if they have a solid model and respectable cash flow. Many, like Key, don’t have the requisite credit history or collateral.
Roxanne Nava, the city’s chief small business officer, spent 15 years doing middle-market lending before making her way into the public sector. “It’s not financially feasible for a bank to do a small loan just because of the economies of scale,” she says.
The loan officer at Charter One told Key as much. But that’s when he caught her by surprise. “He said, ‘Our goal is that if we can’t help you, we’ll find the resources who can help,’” Key says.
The officer made a call to Accion Chicago, a nonprofit small-business lender. After meeting with a loan officer at Accion, Key had secured a $15,000 loan. “It provided some breathing room to meet payroll and additional expenses,” she says.
Last year, Accion doled out about 425 small-business loans in Chicago; the average size of each was around $8,000. The fund has been going like gangbusters in recent years. Jonathan Brereton, Accion’s CEO, pegs its annual growth rate over the past five years at 20 to 30 percent. Still, Brereton’s organization only lends to about 1 out of every 10 entrepreneurs that come through the door.
“We don’t want businesses to fail, so we’re careful on the underwriting side,” he says. “Both a bank and us are going to care about cash flow. But a bank is also looking for collateral as a repayment source, and we’re not interested in that.”
Lately, Accion’s had a little more money to play with. In May 2012, the city launched the Chicago Microlending Initiative (CMI), a fund seeded with $1 million for microlending and training two new lenders, the Women’s Development Business Center and the Chicago Neighborhood Initiatives. Mayor Rahm Emanuel announced last week that Accion and the new lenders had doled out $650,000 of the pot and expect to lend the rest by Dec. 1. Both Key and Moore’s loans came out of funds allocated by the CMI.
The loan funds revolve, and a default rate that hovers around 5 percent means that the cash the city allocated to expand the loan pool will continue to be used. However, come December, when the first round of funds is scheduled to run out, Accion’s Brereton says the pace of loans could slow if the city doesn’t commit more cash to the Initiative. “We’re definitely looking at there being a shortfall on that front,” he says.
For now, Key’s paid off her loan and found a new customer. Last week, she catered a meeting of Accion’s small business advisory council.
Photo by Heath Sharp