Kiva Oakland and Others Partner to Make Small Business Loans

The microfinance company, the city, the Oakland Business Center, Capitol One, and the Miller Foundation up their efforts to make 0 percent interest loans for small business entrepreneurs.



Seneca Scott and Jason Byrnes of Kiva borrower Bottom's Up Garden.

Photo by Heather Finnecy

In October, Seneca Scott opened a pop-up garden kitchen called Bottoms Up Cafe in West Oakland. Soon, business was booming, and Scott wanted to expand his operations into a brick-and-mortar shop.

But like many entrepreneurs in Oakland, Scott was short on startup funds. He also lacked the capital required to qualify for a small business loan from a traditional lending institution, leaving him unable to move forward with his plans.

“Most people don’t have $200,000 sitting around to start a restaurant,” Scott said. “The upfront costs are astronomical. It’s not sensible for most people.”

Earlier this year, Kiva, a nonprofit microfinance company, started a campaign to help residents like Scott. On March 16, Kiva partnered with the city of Oakland to launch Kiva Oakland, an initiative to bring crowdfunded 0 percent interest loans to 600 small businesses over the next three years. The city, the Oakland Business Center, Capital One, and the Miller Foundation will match every loan dollar-to-dollar up to $225,000.

Kiva, which was founded in 2005, was originally created to connect lenders from around the world with borrowers in developing economies. In 2013, Oakland became the first American city to partner with Kiva in a program known as Kiva Zip, which allowed the city to vouch for small businesses on the Kiva website. Over the past three years, Kiva has connected more than 600 lenders with more than 110 businesses in the city.

 

 

In both Kiva Oakland and Kiva Zip, borrowers must receive a small investment ($25) from 25 people within their personal network before they can apply for a Kiva loan. Premal Shah, Kiva’s co-founder and president, referred to this process as “social underwriting.”

“We can take the time to actually read someone’s story, evaluate their business, evaluate their relationship in the community, and then invest in them,” Shah said. “A lot of the time that stuff doesn’t really turn up in the algorithmic credit checking system that the banking system is built on.”

This is an important feature for people like Shawn Walker-Smith, who received a $5,000 Kiva loan in 2014 for his company, Tart! Oakland. Walker-Smith said his products were popular with customers, but his business hadn’t been around long enough to establish a financial history that banks could use to evaluate his worthiness for a loan.

“The train of information that larger institutions were requiring, specifically the amount of time that you had been in business, was more than I was actually able to provide,” Walker-Smith said.

Oakland Mayor Libby Schaaf said that she’s an enormous supporter of Kiva’s work, and has personally made loans to three businesses through the website. In an interview, she said that 90 percent of Oakland businesses employ 20 or fewer people, but many of them struggle to obtain start-up capital.

“Oakland has always been a city of entrepreneurs, but it has also been a diverse city with a lot of small businesses that haven’t had access to traditional capital,” Schaaf said.

This problem is compounded for people of color. Ben Mangan, the executive director at the Center for Nonprofit and Public Leadership at the Haas School of Business, said that cities like Oakland are still recovering from histories of redlining—a practice where banks instructed loan originators to avoid making loans to neighborhoods populated by people of color. More recently, some lending institutions have practiced reverse redlining, which involves targeting people of color for high-interest mortgages, increasing their risk of foreclosure.

“It’s very difficult to prove lending discrimination, because it has to meet certain legal barriers, but people of color talk about being discriminated against,” Mangan said. “It’s very fair to say that Kiva is responding to a real pain that people of color and low income communities are feeling.”

But crowdfunding isn’t a guarantee against discrimination. Mangan noted that black and brown entrepreneurs still don’t receive an equitable share of capital through some crowd-funding platforms.

“It suggests to me that even though you have this platform where risk is shared, implicit bias is still alive,” Mangan said.

To help lenders connect with a diverse range of borrowers, Kiva has partnered with trustees throughout Oakland to find entrepreneurs in low-income neighborhoods. But Shah noted that because Kiva loans are capped at $10,000 per project, few businesses will be able to get off the ground without additional loans. Instead, Shah said he hoped that Kiva would help borrowers prove their credit-worthiness to investors.

“We don’t pretend to be the silver bullet for all your capital needs as a small business,” Shah said. “But we really want to be that first yes—kind of like your angel round, if you will.”

For Sean Scott, the loans raised through Kiva will be just a drop in the bucket of his total project costs. But it will cover about a third of the capital he needs to qualify for a small business loan, which he said is putting him one step closer toward his dream.

“The amount of money itself might be small, but the exposure and the help they give you is a great experience,” Scott said.

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