Last week, the Consumer Financial Protection Bureau (CFPB) announced it would scale back an existing plan to protect consumers from predatory lenders. The need for responsible lenders has never been greater.Continue reading
This article originally appeared in the October 26, 2018 edition of Inside Tucson Business.
By Danny Knee, Executive Director of Community Investment Corporation
I would hardly be the first person to declare that small businesses are the backbone of our economy. Considering that small businesses employ half of our nation’s workforce and have accounted for two-thirds of all net new jobs over the past two decades, it bears repeating. Often. And loudly.
It is not hyperbole to state that small businesses have as much impact on our economy as Google, Amazon, General Electric, and Starbucks. Billion-dollar mergers and acquisitions, the behavior of rock star CEOs, and quarterly earnings reports of large public corporations may dominate business news cycles, but small businesses generate 51% of U.S. GDP to relatively little fanfare. While near 75% of economic development funding nationwide is directed to large companies with over 500 employees, small businesses struggle with access to fewer resources they need to thrive and grow.
Most importantly for a nonprofit lender like my organization, Community Investment Corporation, we need to make debt capital more readily available and easier to access in the small amounts that small business owners need.
Unfortunately, the high transaction costs of small business loans relative to their limited opportunity for financial returns discourages investment from traditional lenders. This creates a gap in the marketplace where there are few, if any, reasonably priced loan products for the needs of small businesses. As a nonprofit organization with an economic development mission, we have the luxury of being able to dedicate parts of our loan portfolio to community impact rather than profit. It’s a good investment, too, with research showing that for every $1 in lent to small businesses, an average of $3.79 in gross output in their communities.
CIC and nonprofit community partners such as the Community Food Bank of Southern Arizona, Local First Arizona, and the YWCA of Southern Arizona among others are collaborating to meet the capital needs of small businesses. Our goal is to expand opportunities for traditional and non-traditional entrepreneurs through an approach that has been used worldwide for over 40 years called microlending. Originating in Bangladesh in the 1970’s as a cost-effective public policy approach to fighting poverty in developing countries, in the early days microlending was the practice of providing small loans to support entrepreneurship by women in poverty. The approach is now showing promise as a means to catalyze “mom and pop” entrepreneurship. Different than the “swing for the fences” approach of venture capitalism, microlending represents the democratization of debt capital. It offers a way into entrepreneurship for a diverse population for whom being one’s own boss is often a greater incentive than the chance to become rich.
At CIC we have seen firsthand how microlending (the provision of loans from $500 to $10,000) reduces the barrier of entry for a wide range of entrepreneurs who would otherwise be on the sidelines of an improving economy – entrepreneurs like chef Erik Stanford of Pivot Produce whose business acts an intermediary between local farmers and Tucson restaurants that want fresh, locally sourced produce. Erik received a $5,000 loan through the Community Food Bank and CIC’s Food Entrepreneurship program partnership to expand his cold storage capacity and to purchase a large company delivery vehicle.
We are also working with the YWCA whose hands-on training courses help local entrepreneurs improve their business practices, launch new ideas, or expand their businesses. Raw juice company, Dish for Dosha, was referred to CIC through the Women’s Business Center at the YWCA. Owner, Cecilia Arosemena, used a small CIC loan for startup capital and to purchase an industrial juicer which allowed her to increase production capacity and hire some part-time help.
But we are also striving for more than individual success stories. We want to create systemic change which is why we are helping the YWCA launch their own microlending program. In addition to providing our lending expertise, we are investing in the YWCA’s brainchild of creating a virtual marketplace that will more efficiently link microlenders to micro borrowers and reduce the transaction costs for both parties. We know that we will have to rely on partnerships like this one if we hope to provide the resources needed by small businesses at scale.
It is important that we, as a community, enhance our small business ecosystem. CIC is working with partners to better connect aspiring entrepreneurs and small business owners to the resources they need, including business training, incubation, and acceleration, mentorship, networks, and more convenient access to capital. Admittedly, not everyone should be an entrepreneur or own their own business. Enterprise asks a lot of its creators and owners. But an entrepreneurial spirit is deeply ingrained in the American ethos and remains strong. It is something we need to nurture and harness.
Also, the gig economy is here to stay. Independent contractors and the self-employed now make up over 30% of the private workforce according to a study from MBO Partners. As part of that independent group, 12.9 million people are now supplementing a full-time job with part-time work. Trends suggest the proportion of independent workers as a part of our workforce will continue to steadily increase in the coming years. While these are not the traditional entrepreneurs we may be used to seeing, they are willing to rely on themselves while eschewing the security blanket of full-time wage earning which are traits of entrepreneurs.
The powerful notion of being one’s own boss and the associated benefits, including higher job satisfaction and better health, are alluring. 7 out of 10 American workers would prefer self-employment to wage earning according to a study of latent entrepreneurship. Roughly the same percentage identified being one’s own boss and increased flexibility as primary reasons for being self-employed. There is a strong pull for most people to explore entrepreneurship at some time in their lives. We need to have resources available to them. If we don’t tap into that passion and desire – and we don’t work to increase access through new pathways for nontraditional entrepreneurs – we are undoubtedly leaving innovation, value and community benefit on the proverbial table.
By Nick Henry and Danny Knee
“No credit? No problem!” “Need fast cash? We can help!” These are the types of seductive tag lines you see all around town, or online when you search for a payday or title loan. But what are these loans, exactly? Let’s talk about payday loans.
Traditionally, the way payday loans have worked is that someone in need of cash finds a payday lender storefront and gets a cash advance—usually a few hundred bucks or so—to pay off an unexpected expense or help ends meet. In return, they write out a check future-dated to their next pay day, generally two weeks away. Because it’s a short-term loan, they’ll need to pay off the full amount, plus interest when it comes due. In the immediate term, of course, the borrower can meet their pressing expense, whether it’s food, auto repair, medicine, or rent. But it’s extremely unlikely a borrower can, in two weeks’ time, come up with the cash to pay off their debt in full. This means they’ll likely have to renew or “roll over” their loan, thus incurring more charges and continuing to pay exorbitant interest rates.
According to Megan Leonart, who recently wrote about payday loans for CNBC, the national average on payday loans is 400% interest (APR), and while the loans are meant to be short-term, most end up taking much longer to pay off. The Consumer Financial Protection Bureau (CFPB) reports that the average borrower takes 5 months and $520 in interest and fees (together known as “finance charges”) to pay off their payday loan.
The industry’s argument is that they are providing a much-needed service to economically vulnerable populations because nobody else will lend to them in their times of need. To some extent, they have a point. It is socially and economically beneficial for working class and the working poor to have access to emergency capital when an unexpected expense or loss of income jeopardizes what can sometimes be a very fragile economic balance they are maintaining. And few traditional lending institutions will lend to individuals they consider risky borrowers.
The problem is, as Leonart reports, that payday lenders’ business model depends not on individuals understanding what they are getting into and paying back their loan in a timely manner, but rather, on a process of repeated rollovers and additional finance charges known as the “debt trap.” Rather than providing a much-needed service, payday lenders prey on the economically vulnerable by targeting borrowers who they know cannot pay back their loans in an initial term, thus setting them up for failure. This has been the model from the beginning, and with the rise of the internet and online automatic payments, payday lenders have only gotten more efficient at trapping their borrowers in debt and extracting money from them.
After years of work, the CFPB proposed rules that would require lenders to consider a debtor’s ability to repay their loan before issuing it. The rule was set to go live in 2019, but certain aspects of the rule are being reconsidered. CFPB is under new leadership and the federal government has been under considerable pressure from the payday lending industry, which has a powerful and well-heeled lobby. Starting in 2009, just after the beginning of the Great Recession, all the way through the stabilizing of the recovery through 2015, the lobby spent over $35 million lobbying for less regulation and higher or no interest caps on payday loans. Not coincidentally, just as the Great Recession was taking hold, the payday lending industry doubled its expenditures on lobbying. Far from being a solution to the country’s or individual’s economic problems, the industry saw an opportunity to cash in on the devastating financial struggles of others. Today the payday loan industry is a $38.5 billion market. In states like Arizona—one of 16 to outlaw payday lending—payday lenders have turned to a related, and in some ways more insidious, cousin: auto title lending. (But more on that in a future blog post.)
The payday lending industry doesn’t grow GDP or provide jobs in the aggregate. Nor are they even a zero-sum game. Payday lending takes away from our economy. Only the owners of and investors in payday lending operations benefit, while local economies and community members already in economic distress suffer. It is an example of one of the most egregious forms of wealth redistribution imaginable and one the Sheriff of Nottingham would revel in—taking from the poor at their greatest time of need and giving to more wealthy investors and owners. Parsing numbers from a 2011 study by the Insight Center for Community Economic Development, CNBC reports that “the burden of repaying the loans resulted in $774 million in lost consumer spending and 14,000 job losses. Bankruptcies related to payday loans numbered 56,230, taking an additional $169 million out of the economy.”
At Community Investment Corporation, we believe in the power of the marketplace and in individual choice for consumers and business owners. But we also believe that any legitimate successful business will ultimately have a positive effect on the economy. As a non-profit, alternative lender we are on the side of responsible capitalism. The question is not whether people at lower-incomes and with some credit history issues should have access to capital – on that, we and the payday lending industry agree that they should. The question is should the people with less financial security and often in incredibly difficult circumstances have to pay such a heavy price for access and assistance? According to the “Americans for Fairness in Lending” website, Usury laws have been around since colonial times in America (and date back to the ancient civilizations of Hammurabi and Plato), and until the early 1900s caps on interest rates in the United States were kept at or near 10%. The question of whether there are interest rates too high to be ethical or “right” was long ago settled – except perhaps in the minds of the most zealous free-market advocates – that interest rates above a certain threshold are too high to be ethical regardless of whether people are willing to pay them when faced with a menu of untenable choices (such as being evicted for failure to pay rent or risking job loss because they cannot afford an auto repair and can’t get to work). While payday lenders may not be breaking any laws, we don’t believe what they are doing is in the best interest of our local economy. We need to do better as a community. We need to find a better way that is fair to both the borrower and the lending partner.
This is why, in response to the payday lending crisis, we began brainstorming with our partners at Catholic Community Services and Pyramid Federal Credit Union. The culmination of our efforts has now come to fruition in the form of a new loan product that we are offering as an alternative to predatory loans. We call it “A Better Loan Experience (ABLE),” and while we are only rolling it out as a small pilot at this point, we believe it is a step in the right direction. We encourage you to learn more by visiting our ABLE webpage.
Nick is Community Investment Corporation’s (CIC) Director of Community Lending and Economic Impact while Danny is CIC’s Executive Director.
The scores released April 10, 2018 from the National Assessment for Educational Progress show charter students significantly outperforming district and private school peers across the state.
The results show significant gains over the last eight years, with public charter students outperforming their district and private school peers in every grade level and on every subject tested. This trend is most evident in the scores for eighth-grade reading and math. When separated and measured as if they were their own state, Arizona charter students rank first in the nation in eighth-grade math, and second for eighth-grade reading.
“These results reinforce what thousands of Arizona parents, families, educators and school choice champions have known for years: when it comes to academic performance, Arizona’s public charter school students are setting the pace,” said Eileen B. Sigmund, Arizona Charter Schools Association President and CEO.
The National Assessment of Educational Progress, known as the Nations Report Card, is the only national look at academic achievement across states.
“While there will always be room for improvement when it comes to educating our students, these NAEP scores are further validation that Arizona charter schools are raising the bar and improving public education statewide,” said Sigmund.
About Public Charter Schools
Arizona is home to 556 charter schools serving about 180,500 students. That’s nearly 30 percent of Arizona’s public schools. Signed into law in 1994, Arizona’s charter schools are public schools that are innovative while still being held accountable for improved student achievement.
By the Numbers
Below is the rank of Arizona students combined and broken out by charter students and the corresponding bar graphs.
Caurus Academy, located in Anthem, Arizona, is a fast growing, AdvancED and “A” ranked free public charter school. Founded in the Responsive Classroom approach (teaching that emphasizes social, emotional, and academic competencies in a strong and safe school community), over 400 students in grades K-8th start their day in a nurturing environment, where they explore rigorous curriculum that peaks their personal interests. Morning meetings, experiential and hands-on learning, student-led weekly whole school meetings, an emphasis on social-emotional competence, and differentiated instruction are all part of the culture at Caurus Academy. Boasting an astronomical 139 percent enrollment growth over the past three years, Caurus will be opening the door to grades nine and ten for the 2018-2019 academic year, then adding grades eleven and twelve over the next two subsequent years.
Caurus remains steadfast in combining challenging curriculum with a dedication to the mental, physical, and moral development of all students. This is done by creating leadership opportunities for students, providing access to fine arts curricula, offering a number of extracurricular clubs and athletics, as well as prescribing to the Rigor and Relevance program of instruction. Students love coming to school because they are personally greeted by administration and instructional staff each day, celebrated for their individuality, and allowed to take risks in a safe environment. The Caurus C.A.R.E.S. (Cooperation, Assertion, Respect/Responsibility, Empathy, and Self Control) philosophy is implemented to help students reach their academic potential, as well as be productive “citizens” at school.
Five years ago; however, Caurus Academy was in a much different place. Facing declining enrollment and a shortage in cash flow, a change in leadership was necessary. Dameon Blair, now the charter holder, as well as the Principal and Director, took the helm to right the ship. Blair reached out to Community Investment Corporation (CIC) to help liaise with the school’s bond holder, as well as assist with cash flow by way of a short-term loan. The dedicated guidance of CIC staff in conjunction with the strategic and intentional shift in culture, led to the thriving organization Caurus is today.
On nearly any weekend morning, seating is at a premium at the bustling 5 Points Market and Restaurant. It is proof that Tucsonans are buying what owners Brian Haskins and Jasper Ludwig are selling – a focus on foods and ingredients sourced from local farmers. The restaurant and small grocery, which is named for the intersection on which it sits, has been an important part of the economic and physical revitalization of the Five Points area just south of Downtown Tucson. While there may be some debate as to the exact moment the neighborhood began to rally, the renaissance has been almost a decade in the making now. The opening of 5 Points Market & Restaurant in 2014, a breakfast and lunch hot spot for those looking for a more neighborhood vibe than Tucson’s downtown revitalization offers, has been another important step to putting the Five Points area proverbially back on the map.
5 Points Market & Restaurant has the distinction of being mentioned by New York Times travel writer, Guy Trebay, as his “favorite hipster brunch spot” and being dubbed by Tucson Weekly reviewers as “what a modern neighborhood joint should be.” That’s high praise and proof that Brian and Jasper’s instincts about what Tucson wanted and needed from a local eatery were right. Reasonably priced breakfast fare that includes huevos rancheros and a large “Make Your Own Breakfast” section at the bottom of the menu with umpteen choices of fresh, locally sourced food, has people literally lining up to eat there. But things haven’t always been easy.
The duo got their start in the restaurant business after some struggles during the recent recession. Brian and Jasper moved from Olympia, Washington and settled in Tucson in 2010 but job opportunities were sparse for both at the time. They had worked with at-risk youth in the northwest, but Brian and Jasper turned to their experience working in restaurants in high school and college when they couldn’t find jobs in the nonprofit sector. He and Jasper had an existing and growing interest in food politics and “food paths” (how and how far foods travel from the places they are produced to the people who eat them). Now, they have leveraged their interest and knowledge about the food distribution networks into a successful business that is working to become a model for what can be done within vibrant partnerships between restaurants and local growers. Along the way, these dynamic entrepreneurs have received some help, including some recent financing that allowed Brian and Jasper to buy out a silent partner. “It’s important that we own the business ourselves because of the direction we want to go,” Brian said. “That’s the best part – it’s ours.” He emphasizes the last two words as his face breaks into a smile.
With a loan from local nonprofit lender, Community Investment Corporation, Brian and Jasper were able to secure full ownership of the business, as well as make kitchen floor repairs and to purchase a commercial food processor in preparation to expand the restaurant’s hours and serve a third meal, dinner.
Brian describes how banks, despite the restaurant’s early success, weren’t willing to loan to them and how alternative lenders who might have been interested in their business were charging interest rates far beyond what they could afford. Additionally, because of some contractual obligations, Brian and Jasper needed their loan on a short timeline that other lenders couldn’t meet. “Most importantly, Community Investment Corporation was willing to make the loan,” Brian said. “They also offered a lower interest rate in a timeframe that other SBA (Small Business Administration) lenders couldn’t meet and honestly, their staff was nice and helpful.”
For CIC Executive Director, Danny Knee, the loan was a no-brainer. “Brian and Jasper are perfect examples of why we never underestimate the dreams of our borrowers or the economic impact of their efforts,” says Knee echoing the organization’s vision statement. “They are having a bigger impact on our local economy than just running a successful business. They are impacting the way food travels from farm to table and they are keeping money in the region.” In fact, all of their beef and pork comes from local ranches including the University of Arizona’s, their eggs come from Wilcox, and over 50% of their produce comes from local farmers.
There are a lot of local efforts around food paths including Farm to Table programs. Entrepreneurs like Brian and Jasper are the unsung heroes of our local economies. Their drive to source food locally has benefits well beyond their own bottom line. The direct economic impact on regional economies from spending on locally sourced food is well researched. For example, in one study it was estimated that if North Carolina residents spent just 10% of their food dollars (roughly $1.05/day), approximately $3.5 billion would be available in the local economy every year. Whether or not you believe the exactitude of the much ballyhooed (and occasionally debated) statistic that produce travels an average of somewhere between 1,000 and 1,500 miles from farm to plate, there is little doubt that locally sourcing food for restaurants and markets benefits local farmers, local economies, local consumers, and the environment.
“We focus on where our food comes from and we pride ourselves on the care we take in preparing it,” says Brian. “And providing steady income to local farmers is one of the most important things I can think of.” Brian and Jasper also support their community by paying their employees well and promoting from within, practices which have led to low staff turnover.
Future plans include obtaining a liquor license so they can sell alcohol with meals and packaged beer and wine from their grocery. As always, they’ll be looking for the local angle and trying to stock beers from local breweries.
Success had bred growth and expansion including opening a farmers market at Cesar Chavez Park, a small pocket park next to the bricks and mortar of their restaurant and small grocery. This has allowed farmers to deliver produce to the restaurant and sell to the public in one stop. It has also provided patrons with something to do while they wait for a table, something that happens often during their peak season from November to March. The farmers market is now open every Sunday from 10 a.m. to 2 p.m.
5 Points Market & Restaurant is located at 756 S. Stone Ave and is open everyday from 7 a.m. to 3 p.m.