It Takes a City

Bad things seem to come in twos for 5 Loaves, a beloved Chatham eatery. Since its opening in 2004, fire has twice damaged the restaurant’s interior (there was nearly a third fire earlier this month when an adjacent property caught fire), and twice has the property’s copper electrical wiring been stolen.

As far as unforeseeable disasters go, fires may as well be a restaurant’s rite of passage, and wire robberies are similarly commonplace; Slate has dubbed our time the “Golden Era of Copper Theft.” But for a small, family-owned and -run business like 5 Loaves, closing for as little as a week is devastating, said Constance Simms-Kincaid, the eatery’s proprietor. “Hundreds of dollars of food go to waste, and we lose touch with our regular customers. And we spend the time closed without income.”

She found herself in what seemed to be an inescapable debt cycle: there was little that could be done to prevent the thefts––the wiring, off property, was uninsurable, but overwhelmingly expensive to replace. She was hesitant take a loan to cover the losses because of an already low credit score.

After the second wire theft, in late February, 5 Loaves decided to keep the restaurant open to distribute its remaining food for free. There was no power, and Simms-Kincaid said that it felt as cold inside as it did out, but many Chatham residents showed up. One man, a regular, sat inside with them for the entire day. Tears came to Simms-Kincaid’s eyes as she remembered his support and the generosity of a woman who brought over a check for $1,000 to go toward repairs. Stephanie Hart, owner of the nearby Brown Sugar Bakery, offered 5 Loaves money from her own register.

These gestures helped to keep the restaurant open, but they were short-term fixes. Now, Simms-Kincaid says, they’re working on the long-term. She recently joined the Chatham Business Association’s Business Builders program, which offers resources and loan assistance for small businesses. Simms-Kincaid also recently started looking into taking a credit-building loan, a kind of micro-loan designed to help small businesses boost credit scores.

Some might hesitate to call 5 Loaves lucky after the trials of the last several years. But Simms-Kincaid stresses how lucky she is to serve a community as close-knit and supportive as Chatham. What’s more, the eatery has avoided the fate of other small businesses in similar financial straits, many of which have fallen victim to predatory lending.

5 Loaves, caught in a tight spot with low credit, would have been an easy target for a predatory, or alternative, lender. The business-to-business loan market has been likened to that of payday loans; with misleading rates, APRs (annual percentage rates) nearing 100 percent, and hidden fees, these unregulated lenders pose a serious threat to small business owners in Chicago and across the country. But despite the loan market’s gradual recovery, predatory loans are only becoming more pervasive. Chicago’s one-of-a-kind microlending institute and network of business associations, however, continue to develop in response to these loans and to offer a more comprehensive support system for small businesses on the whole.

The commercial loan market has not recovered equally across the board in the years following the 2008 recession. Though loans greater than $1 million now stand twenty-four percent above pre-recession levels, loans of $1 million or less still lag seventeen percent below the pre-recession peak. Nationwide, independent banks have decreased in number by fourteen percent. This has left a substantial gap in the loan market in precisely the range most suitable for small and new businesses––between ten and one hundred thousand dollars.

Filling this small loan gap are business-to-business lenders that engage in merchant cash advancing. Unregulated, web-based, and requiring no minimum credit score, these lenders may appear convenient to the small business owner who urgently needs money but doesn’t have the time or credit to apply for a traditional bank loan. But the deceptively high interest rates of these loans often lead small businesses into bankruptcy.

“Business-to-business lenders are not uniformly bad,” said Mary Fran Riley, Vice President of External Affairs of Accion Chicago, a microfinancing nonprofit. “But most aren’t interested in best serving the business––they’re interested in making a profit.”

It can be difficult to tell the “good actors” from the bad. Community Development Financial Institutions and corporations such as Paypal and Square, which have recently stepped into the microlending market, generally underwrite loan packages responsibly and offer APRs of thirty-five percent or less, and sometimes as low as seven percent. But “bad actors” bury hidden fees in loan packages and fine businesses not just for paying back a loan later than its due date, but for paying early, too.

But it wasn’t just predatory lenders who recognized a need for small loans after the recession; Accion Chicago, a nonprofit that provides counseling and microfinancing services for small businesses, did too. Accion had been active in Chicago since 1994, but in 2008 began to expand its microfinancing services before recognizing that there was a limit to how quickly it could grow as an organization.

Accion worked closely with Mayor Emanuel and the city of Chicago to create the Chicago Microlending Institute (CMI), which began operations in 2011. Combining a $1 million investment from the city with Accion’s successful microlending model, the CMI was touted as a one-of-its-kind institute. Its aim was not only to provide capital for small businesses, but also to train other Chicago-based institutions to make microloans and offer financial counseling themselves.

“[Microlending] is a very tough business in itself,” Riley said. “People were assuming microlending didn’t work because organizations were taking on large loans without the strong underwriting practice necessary and going under themselves.”

With a training system and revolving credit fund in place, the members of the microlending institute proved that microlending doesn’t just work––it helps grow local business. In its first two years of operations, the CMI loaned $1.1 million through 126 microloans and created 240 jobs across Chicago.

Between the five organizations currently accredited by the CMI (Women’s Business Development Center, Chicago Neighborhood Initiatives, Accion, the Duman Entrepreneurship Center, and the North Side Federal Community Credit Union), and other microlenders accredited by the national Small Business Association, the network of microlenders in Chicago offers a variety of services, including microloans, financial and technical assistance, and credit-building loans.

Despite the program’s continuing success, microlending organizations still meet with clients who have been recent victims of predatory lending. According to Erica L. King, Vice President of the Chicago Neighborhood Initiatives Micro Finance Group, there is still little awareness of the strength of the microlending program or about the danger of predatory lending among small business owners in Chicago. “Business owners often assume that if they can’t go to a bank, [an online C2C loan] is the best offer they’ll find. They don’t think to turn to anyone for guidance.”

“But,” she added, “we want to debunk the myth that it’s hard for a small business owner to get capital.”

Many of Chicago’s longstanding business associations have expanded in capacity and objective since the creation of the microlending institute. The Chatham Business Association (CBA), a community resource since 1972, has begun to offer microlending assistance within the last couple of years. Chicago Neighborhood Initiatives, too, has been around for a decade, originally going by the name Pullman Neighborhood Initiatives; only in 2010 did it change its range to “Chicago,” becoming a core CMI member in 2012. Today, these groups and others are working harder than ever to help business owners become self-sufficient and aware of all of the resources available to them.

The CBA has been an indispensable resource, Simms-Kincaid said. It was through the CBA’s technical assistance that 5 Loaves developed its online and social media presence, which in turn helped to build up its customer base. And during a period of financial troubles, it was the CBA that authorized Mae Whiteside of CKL Engineers LLC to pay forward on a loan to 5 Loaves––in other words, authorized CKL to make a loan repayment directly to 5 Loaves.

Part of what sets the microlenders apart from the larger banks is this flexibility, as well as an interest in sustainability and community development. “We’re really not just a transactional lender, we’re not a bank. We’re mission driven, ” King said of the CNI.  “We certainly don’t make any money doing what we do.”

Before anything else, King said, a loan officer sits down with the client to make sure that a loan is in their best interest. “Sometimes we find that the business just needs to do a little bit of internal restructuring to reach financial stability. And we don’t just look at the business’s credit score. We listen to their story, because we understand that divorces and other such things happen.”

Though the standard minimum credit score for bank loans is between 660 and 680, King says that 660 is about the highest credit score any of their clients have. “We have a client who has a credit score of 474 right now, and we’re making it work.”

The CNI’s average loan is between ten and twelve thousand dollars. Since 2012, the CNI has given 46 loans, totaling $590,000. As a direct result of these loans, 194 jobs have been either created or retained, and a net $2.7 million has been directed to the businesses’ communities.

Now, 5 Loaves is looking into applying for a credit-building loan with the guidance of the CBA. Taking this loan, which can be anywhere between $500 and $2,500, would not only raise their credit score, but would likely allow them to take a larger loan out upon payment of the first. Simms-Kincaid hasn’t yet decided whether or not it’s the right fit for her business, but she does know that 5 Loaves has the support of the CBA behind it.

There are resources other than microlenders available for small businesses in Chicago, and the city has been working to expand these resources, as well as increase awareness of them. On May 19th, BLUE1647 Englewood (a new partnership between the business incubator BLUE1647 and the Greater Englewood Community Development Center) hosted a Startup Boot Camp, the first of a series organized by the city of Chicago’s Small Business Center. The event featured a financial workshop by Accion, networking opportunities, a presentation by Google on the importance of connecting online with consumers, and speeches from 20th Ward Alderman Willie Cochran and Mayor Emanuel at the end of the day.

Small business resources, old and new, were the main topic of discussion. Emanuel spoke of how, in order to simplify the business licensing process, he has cut the number of business licenses down from one hundred and fifty––more than the business licenses in six other states combined, he joked––to fifty. Angie Hall of the Law Project, a nonprofit organization that offers free legal consultation for business owners, also spoke. “As business owners, not only do you need access to capital, but you need access to legal services,” she said.    

Mayor Emanuel announced that the Small Business Center would be the first city department to go paperless. Going paperless, he said, means that the department will effectively be open and accepting file submissions twenty-four hours a day. “We want you with your customers,” Mayor Emanuel said, “We don’t want you at City Hall.”

Predatory lending was not discussed much at the Boot Camp itself, but the city has been proactive about raising awareness. In January, the city announced a campaign to put up ads on the CTA and on the city website, advising business owners to call 311 or to go to the nearest Capital Access Center to seek advice before taking a loan.

Mayor Emanuel earlier this year also called on state officials to create regulations for business-to-business lenders. Riley of Accion said that there is currently a nationwide call for a Small Business Borrowers’ Bill of Rights that would resemble a “good seal of approval type of thing.” Such a bill, she said, would require regulations and transparency standards for business-to-business products such as merchant cash advances and online predatory loans.

It may be some time before regulatory legislation is passed, if only because few cities have begun to take action against the threat to small businesses posed by predatory loans and because nationwide concern has only just begun to increase. As a result, most think that predatory lending is likely to become a greater threat before it is resolved. But through the strength of the CMI, the small business network in Chicago, and the initiative to educate business owners about the dangers of predatory lenders, 5 Loaves and many more small businesses across the city will hopefully keep their doors open long enough to see that happen.

Correction: an earlier version of this story stated that the CNI has given 146 loans. They have given 46.