The hall was silent as Maggie West, Program Director of the Community Empowerment Fund (CEF), left her table and walked up to the podium.
“We gave micro-loans out to five people. Only one of them was repaid,” she said. “One of our clients came to us with his first paycheck in months, but was afraid he would spend it on drugs. We realized, in that moment, that our best asset was building relationships with these people, and helping them save the money they had earned.”
She was the first to share her story at the Lend for America (LFA) summit’s workshop on “Making Smarter Mistakes.” Other students followed suit, sharing triumphs, losses, and unexpected lessons they took away from these experiences. I started to pick up on a general theme: everyone was new to microfinance and didn’t quite know what they were doing, but nobody was willing to give up on their goals.
LFA—a nonprofit that connects and mentors college campus microfinance organizations—began hosting these summits last year. The nonprofit offers workshops to aid microfinance groups in all stages of their development, but most importantly, enables such groups to learn from each other’s experiences. I am a member of Elmseed, Yale’s own microfinance organization. We serve low-income entrepreneurs in New Haven by offering consulting, loans, and an Entrepreneurial Development Course. I was stunned to learn that, though we are only twelve years old, we have been up and running for twice as long as any of the organizations there.
There is a huge newfound demand for microfinance organizations, and enterprising college students—eager to be a part of this growing movement—have started their own in droves. Though these microfinance groups aim to help low-income entrepreneurs, they are at the same time entrepreneurs themselves. Microfinance organizations take on the ultimate risk and give out their own money, in the form of small loans, to people who are unlikely to pay them back. The financial risk is paramount.
Giving loans to such risky clients seems to go against common sense. A bank would never do it; clients without a credit score or a steady source of income are not guaranteed to repay their loans. And even for clients who do not lack income, a low credit score would yield ridiculously high interest rates that would bar them from taking out a loan. These barriers to entry perpetuate a cycle of poverty. Those who need the money most—for the survival of their business and their families—are unable to receive loans from banks because they are too risky.
Microfinance organizations have sprung up across the country in order to combat this disparity. They are lenders of last resort that give small loans to clients who wouldn’t ordinarily be able to take out a loan on their own. Their goal is not only to give these people money, but also to hold them accountable for their repayments. This ensures that they are both enhancing their business and learning good financial practices. Once they build credit and learn how to better manage their finances, they will eventually be able take out loans from more typical sources.
This creates an unusual dynamic of entrepreneurs trying to help entrepreneurs. The process involves a lot of mistakes because the clubs are so young and diverse and their practices so potentially risky. An organization that is founded to help empower people should take the riskiest clients because they need the most help. But if all clients were to default on their loans, the organization would cease to exist—unable to help anyone. In an attempt to fix this problem, LFA has begun providing mentorship to microfinance students across the country.
At the LFA Summit, I realized that I could learn a lot from other microfinance clubs, no matter their age. The Community Empowerment Fund had a entirely different model than ours, tailored to fit the needs of their community. Elmseed can best help New Haven by working with low-income clients to improve their businesses. CEF is best equipped to help lift the homeless out of poverty. Hearing about the practices of other organizations made me reevaluate the way Elmseed operates. Part of the reason we are so successful is because we don’t take the riskiest clients, but that may be a strategy worth reconsidering. Despite our differences, both Elmseed and CEF are both entrepreneurial ventures. Like more traditional start-ups, we cater to specific markets in order to best serve our clients.
In the age of Silicon Valley, it’s easy to get trapped into thinking that entrepreneurship must involve cutting edge technology or innovative software. In actuality, entrepreneurship is simply the creation of an organization that assumes financial risk. Microfinance risks more than that. Loans and good credit may be one of the most important tools we can give people, but it is really the relationships that dictate the success of the organization. Our model risks not only our own finances, but our relationship with our own clients. At its core, microfinance is really just people trying to help people. Entrepreneurship is not typically associated with that goal. Perhaps it’s time to rethink.
Photo credit: Lend for America