Microlending Report 2021 : simplebooklet.com

Barrio Alegría conducted an exploratory study to outline entrepreneurial challenges formicro-entrepreneurs and assess the feasibility of launching a lending circle program inReading. Over a 16-week period in the first half of 2021, Barrio engaged 35 Reading-based business owners through a combination of community focus groups and individualinterviews to better understand the challenges and lending needs of micro-entrepreneurs inthe city. Barrio also researched existing local community development financial institution(CDFI) products and assessed general willingness and interest in a targeted loan productfor Reading micropreneurs. This study finds that there is interest in alternative microlendingproducts by local micropreneurs, that recent changes in the CDFI landscape presentadditional opportunities for partnership, and that Barrio could play a critical role in this overthe next few years. This report outlines strategic recommendations for Phase II, includingthe a) incorporation of an evaluation consultant to measure program efficacy, b) launch ofan initial lending cohort guided by industry best practices and incorporating the MostSignificant Change Technique (MSC) evaluation protocol, c) strategic relationship with localCDFI to expand their local affinity group model, and d) integration of a creative place-making component to assist with local marketing. Executive SummaryMethodology: What did we do?Over a 16-week period, from late January to late May 2021, Barrio Alegría conducted aPhase I feasibility study to assess its participation in launching a microloan program inReading. To that end, Barrio (a) reviewed best practices for microlending models; (b)outreached to area merchants, engaging them in a combination of focus groups andindividual qualitative surveys related to their needs; (c) reviewed the current capacity ofexisting CDFIs to participate in the launch of a lending circle program in Reading; and (d)explored Barrio’s potential role in Phases II and III.During weeks 4 through 9, we surveyed 35 local entrepreneurs and held 4 focus groupsessions. The surveys and focus groups were designed to gauge business needs anddetermine appetite for lending products or business services. It is important to note that themerchants were selected for participation based on Barrio’s network of business ownersand program participants. In keeping with best practices in qualitative research, participantswere selected based on relevant experience, relationships, and expertise. The survey resultsbroadly paint a picture of the experience of Latin@ micro-entrepreneurs in Reading. Resultsreported here combine the focus group data with the individual interview data2

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60% of surveyed entrepreneurs identified aswomen, 26% identified as male, and 14% were jointowners of a business with a spouse/partner(represented in figure ‘1’). Of the entrepreneurssurveyed, 9 had established businesses existing forover 5 years, 15 had growing businesses with 2-5years in existence, six (6) had been running theirbusiness for less than 2 years, and 5 wereentrepreneurs looking to start a business in Reading(represented in figure ‘2’). A majorityof participants identified as Hispanic/Latin@business owners (86%), while only 8% identified aswhite and 6% identified as African-Americanbusiness-owners ( represented in figure ‘3’). 57% ofthose that were already in business had a physicallocation or storefront, while 43% were operating outof their home. This Phase I feasibility study was conducted by across-section of the Barrio community, whichincluded Board, staff and community representation.Brian Kelly - Board member and communityeconomic development professional with over 20years of experience in the field - provided strategicguidance during the conceptual development andexploratory research components of the project.Daniel Egusquiza - Executive Director andcommunity transformation practitioner with over 10years in the field - provided project managementoversight and partnership development. FabiolaFlores - Barrio Alegría staff person currentlypursuing Business Management certificationthrough RACC - conducted the community outreachand project coordination for the project. All threecollaborated on the study and the generation of thisreport. 1233

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While the Microlending pilot program is aligned with Barrio’s mission, its Board of Directorshas maintained a cautious approach to determining the fitness of a microloan projecthoused at Barrio. Prior to and throughout Phase I, the Barrio Board of Directors vetted theproject to determine (a) alignment with mission, (b) determination of community need, and(c) organizational capacity. During March and April 2021 Barrio reviewed the capacity of existing communitydevelopment agencies that provide business support services to merchants. The selectioncriteria heavily weighted (a) organizations who had a strong background in communitylending, especially with immigrant populations, (b) had experience with alternativecommunity lending models, specifically lending circles, (c) had experience in Reading, PA,and (d) whose mission and values were complementary to Barrio’s. We identified twopotential partners for the project and conducted exploratory conversations with both.ASSETS and Community First Fund are both Community Development FinancialInstitutions with established reputations in the region who provide lending and businesssupport services and meet all of our selection criteria. We held exploratory conversationswith staff at each organization to gauge interest in collaboration. What did we find?A. Local Entrepreneur EngagementSeveral themes emerged while investigating the experience of micropreneurs in Reading. Theme 1: Business Support Service usage and understanding. 37% of surveyed business owners (13) had received publicly available small businesssupport services in the past (ie. business plan creation, marketing, cash flow forecasting,etc. ), while 63% indicated that they had never received such business support services.This supports the initial hypothesis that despite the extensive business support servicesavailable, many entrepreneurs are not taking advantage of these services. When we explored the reasons why, many indicated that they did not know such programswere available. Others indicated that although they heard that programs were available,they didn’t know anyone who had been there so did not pursue it. A small number ofparticipants indicated that the organizations were difficult to get in touch with. 4

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Another theme thatemerged was a generaldistrust of “free businesssupport services,” with 2primary reasons cited. Overhalf of those that expressedthis distrust cited a generaldistrust of governmentalinstitutions alongside abelief that most businesssupport programs have linksto governmental agencies. This distrust was particularlypervasive amongst thosewho felt vulnerable based ontheir personal or familialimmigration status.The gap between the availability of businesssupport services and the utilization of thoseservices by local business owners has rootsin a lack of information and historic distrust. Approximately 30% of those citing distrust demonstrated a clear lack of understanding aboutwhat publicly available technical assistance services were available. To them, “free businesssupport services” sounded like the opening line to get you in the door, so that they could try tosell you a package or some service. “Who gives away consulting services for free?” was arecurring theme with this group. Several people indicated that they already knew theywouldn’t be able to afford whatever “recommendations” came from the consultation, so whybother exploring further.Another common theme was the exclusivity of language when it came to potential businessservice support. For example, there was virtually no demonstrated interest in support aroundcash flow forecasting, operating capital, and financial projection modeling, when asked aboutthese topics explicitly. However, a majority of those interviewed indicated that they subscribeto the “when we have cash, buy things that we need, when we don’t have cash, make duewith what we’ve got,” management method, and would like support in breaking that cycle. Once those surveyed received a little more information about business services, 31%indicated they are interested in receiving support around marketing, while 17% wereinterested in support with website development, 17% were interested in receivingnetworking/coaching support, and 14% expressed an interest in having a single point ofcontact that they could turn to related to support for their business. 5

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Theme 2: Loan utilization, appetite & belief systems34% of surveyed business owners had received at least 1 loan in the past. Of the 66% ofbusiness owners who have never received a loan, the majority indicated that they assumedthey did not qualify and therefore have never tried to get one.The other common themesamongst those who had not taken out loans in the past included (a) a general fear of takingon debt because they could potentially lose their business, and (b) the belief that theyneeded a business plan in order to take out a loan, and that they didn’t have one. 83% of those surveyed expressed an interest in taking out a small loan, a majority of whom(86%) indicated an interest in receiving a loan of $501-5,000. 10% of those interested in aloan preferred a loan of less than $500, while only 1 micropreneur indicated an interest inreceiving a loan greater than $5,000, specifically to increase her inventory of elegantdresses. Theme 3: Business plans26% of the business owners surveyed indicated that they either have an incompletebusiness plan and/or would like assistance in developing their business plan. When thosewho didn’t have a business plan were asked why they didn’t have one, the common themesthat emerged were (a) not believing they had enough time/capacity to put it together, and(b) not feeling that they had enough money to pay someone to make their business plan.Theme 4: Trust networks Of those that understood that business support services and loans were available, they didnot feel comfortable going to those programs because they didn’t know any otherentrepreneurs who had also used those services. Barrio has found that trust networks arevery important in community work, and misinformation is rampant. A common theme that surfaced was a willingness to participate in a lending program dueto Barrio’s involvement. Several owners cited their trust in Barrio as a key factor for theirwillingness to entertain pursuing financial and business support. While there may be someselection bias based on the survey participants being selected based on previousexperience with Barrio, this feedback was unsolicited. An additional theme that emerged was the micro-clustering of social capital and trustnetworks, perhaps unsurprisingly along extended familial and/or common origin lines. Thisconfirmed a preference in favor of the initial hypothesis that lending circles should berooted in existing social capital networks. Mexican entrepreneurs, for example, expressed a6

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willingness to enter a lending circle with other Mexicans with whom they had priorrelationship and trust. This may mean that despite a general trust of Barrio as anorganization, an interethnic cohort of borrowers may present additional challenges tosuccessful implementation of a lending circle program. Best practices in the field seem tosupport this hypothesis. B. Lending Circles Model and Existing CDFI Landscape ReviewExploratory research focused on the lending circle models, a subset of the larger field ofmicrofinance. The model has appeal because of a) its higher success rate, b) its communitymodel, and c) its applicability to people on the economic fringe. The average annual default rate in Pennsylvania for SBA loan products is 14.2% for thestate’s largest provider of SBA loans. For specialized microlending programs run bynonprofits, average default rates exceed 15%. An internal Community Developmentdepartment report indicated the default rate of government-issued microloans exceeded30% in the City of Reading. In contrast, the industry default rate for peer-to-peer lendingmodels averages 2-4%; admittedly the peer-to-peer models are generally technology-Some business owners with over 30 years of operations have not taken out a bank loanbecause of a general distrust with the banking system. 7

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based and not necessarily low-income community focused. Lending circles are very common in immigrant communities and areas where the traditionalbanking services are not widely accessible. The Mexican tanda, Korean kye, and WestAfrican susu are all examples of informal loan clubs where participants all contribute atregular intervals, and alternate who receives the ‘loan.’ The lending circle model adds aninteresting community element to the microloan concept, because everyone is involved inloaning funds to each other. A 2-year study of five lending circle initiatives in the Bay areafound a default rate of .7%. The models from that study focused on personal loans for thepurpose of credit building, as opposed to small business lending. Barrio’s attraction to this program relates to how collective success is built into the model,as opposed to traditional lending programs that focus solely on the individual. Despite itsalignment with the Barrio mission, the Board of Directors indicated a hesitancy to moveforward with a lending program in-house, citing capacity concerns. The feasibility studytherefore included early stage discussions with two (2) local community developmentfinancial institutions to evaluate current offerings and determine fitness for a potentialpartnership. ASSETS is a non-profit organization based in Lancaster, PA “focused on transforming thecommunity through ethical and inclusive business. ”ASSETS offers entrepreneurial training,community lending, and impact consulting services to local businesses and prioritizeswomen and POC-owned businesses. Their microloan model is designed for borrowersunable to get traditional bank loans, and includes personalized financial counseling andgroup entrepreneurial training. Barrio was very interested in their emphasis on communitytransformation through inclusive entrepreneurship and ethical business.Assets has a well-developed model that seems to include critical wrap-around services forsmall business and micropreneurs. In our exploratory conversations, Assets indicated that itwas not interested in offering alternative loan products themselves. Their leadership teamindicated that although they are willing to serve in an advisory capacity, and could provideloan application review support for a fee, they did not have an appetite to take on the legaland financial responsibility of servicing loans. Community First Fund (CFF) is a community development financial institution that providesloans, business training, and one-on-one counseling and is “committed to aligning capitalwith justice for low income communities and low wealth individuals.” CFF has underwrittenloans as low as $500 using its vast experience in community finance and technical support.The organization maintains an office in downtown Reading, and has a significant capacity 8

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to lend funds. In 2020, CFF merged with Finanta, another mission-driven CDFI based inPhiladelphia with a robust affinity group lending program. The CFF/Finanta affinity group lending model combines lending and technical assistance. Affinity groups are informal and members share some sort of community, cultural, family,friendship, industry, or neighborhood connections. Loans are guaranteed by the entiregroup, and each group member receives loans of between $1,200 to $3,600 with a 12-24month payback period. The program “is tailored for entrepreneurial borrowers seeking toincrease business and financial capacity.” Currently the affinity group model is only offeredin Philadelphia, but CFF indicated that they are planning to expand it to additional marketsserved by Community First Fund, including Reading. This expansion has not yet happened,but staff indicate it could be as early as late 2021. Staff indicated that Barrio could play arole in potentially identifying a local affinity group to take out a loan. One important difference between the Affinity Group Lending model offered byCFF/Finanta and the traditional Lending Circle model, is that the latter is structured more asa community savings program. In the Lending Circles model pioneered by Mission AssetsFund, total strangers can participate in a group lending circle.Each participant contributesmonthly, usually $50-$200 monthly, and loans are distributed from the contributions ofeach member. In an instance of default, the organization makes up the difference to ensurethat those contributing receive their full amount. The focus here is on credit building forparticipants. The CFF/Finanta model focuses on business loans, whereby participantsreceive loans of $1,200-$3,600 with a repayment period of 12-24 months, in addition totechnical assistance and business support services. Pre-existing relationships are veryimportant in this model, because the borrowers all co-guarantee each others’ loans. Staffindicated that the loans were predominantly used by extended family networks wherethere was a lot of social reinforcement to ensure repayment. C. Role of Barrio Alegría in Microfinance? Before exploring how Barrio could be involved, it is important first to explore the existentialquestion of whether Barrio should be involved. After all, as an arts-based, communitybuilding organization, neither lending nor community finance are a core competency forBarrio. Based on the recent merger with Finanta and CFF’s interest in expanding the affinity grouplending circle model to Reading, Barrio is hopeful that specialized loan products andtechnical assistance will now be available to micropreneurs in Reading in a new way. Thisestablished CDFI has decades of experience supporting wealth-building in low-incomecommunities. They process, service, and monitor lending products, in addition to providingmarketing, management and other technical assistance to businesses. 9

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Preliminary research into the field of microfinance revealed that a lending circle model sawsignificantly reduced default rates over individualized lending models. This makes sensebased on Barrio’s theory of change and the importance of community support. In short,microfinance and lending circles are not just about loans; they are about communitybuilding. Loans provide crucial operating capital to cash-strapped entrepreneurial efforts,and outcomes are improved when the loans are paired with technical assistance and othercommunity support. Based on Barrio’s core competency in community building, it appearsthat Barrio could play a critical role in setting the foundation for this initiative here inReading by adding value in three explicit areas: 1. Trusted Business Navigation ServicesThe web of business support providers is sometimes complicated to navigate, and many ofthose surveyed expressed interest in there being a single point of contact to understandwhat resources are needed, and the research found significant misunderstandings inbusiness owners’ understanding of the nature and availability of business support services.Furthermore, the technical jargon of the community development field can be intimidating. Due to its local reputation, Barrio could leverage its social capital to make referrals to theappropriate business service providers. This community business navigator role would be anatural fit, and Barrio could act as a bridge to the interconnected web of business serviceproviders, lessening the barriers to entry of micropreneurs focused on their businesses. Thiswould also help in the advertising of these programs to micropreneurs who often fly underthe radar screen and don’t know about available services. 10

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2. Creative Place-making31% of those surveyed expressed interest in receiving marketing support, and identifiedthat they didn’t have the resources to get the word out about their business to morepotential customers. Creative placemaking describes initiatives in which art plays anintentional and integrated role in place-based community planning and development.Barrio’s arsenal of creative placemaking tools could be deployed in support of themicropreneurs selected into the lending program. The microfinance industry has longrecognized the importance of pairing financial products with marketing, management andtechnical assistance. While these services are helpful for the entrepreneur, a key ingredientis aligning the interests of the community with the success of the local businesses. Barrio’sactivation of local artists helps to spark new life into often overlooked areas of thecommunity, and can stimulate additional market interest. 3. Affinity Group DevelopmentThe CFF/Finanta Affinity Group Lending Circle model seems very promising and we lookforward to its expansion to Reading. Staff indicated that this model often revolves aroundexisting extended family networks who approach the organization. Barrio sees anopportunity to merge the strength of the lending circle model with the existing structure ofthe Affinity Group model. The lending circle model has significant value because it canbring together individuals who do not know each other to build relationships and trust andsupport each other to improve their individual credit circumstances. Barrio’s bedrock is thedevelopment of this community trust through its reweaving of the community fabric. Barriocould therefore be involved in the trust-building component, assisting in the assembly of anaffinity group that would apply to the CFF/Finanta for the Affinity Group loan. D. Measuring for Impact Our review of the field of community microfinance solutions revealed the importance ofprogrammatic evaluation. How will we be able to measure the programs’ results anddetermine if it is working? Barrio will be performing community building and creative-placemaking while strategically referring Affinity Groups to a local CDFI capable ofproviding the technical support that they need. What exactly does the model look like? Barrio has recently been exploring how to further embed the Most Significant ChangeTechnique (MSC) evaluation model into all of its programming. The MSC technique is apowerful story-based and participatory tool that organization’s can use to evaluate theimpact of community projects beyond the standard quantitative metrics (ie. # of loansdistributed and default rates). While broadly used, MSC has found increasing application tothe community development field. 11

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During March and April we held several conversations with a boutique consulting firm thathas international experience in microfinance programmatic oversight and evaluation.Collective Justice Consulting has a team with decades of experience working andconsulting on organizational development and culture change, leadership coaching,operations and impact evaluation, storytelling and communications for groups, institutions,and governments internationally, nationally, and regionally. Their lead consultant hasworked extensively on evaluation and policy projects with the United Nations in New York,Geneva, Mali, and Somalia, and has specific experience in the evaluation of microfinanceprograms (e.g. FINCA Zambia 2011 Client Assessment Study) and market-basedapproaches to the prevention of violent extremism (e.g. 2017 evaluation of a UN deminingand employment project in Somalia, 2018 evaluation of a UN community developmentproject in central Mali). This lead consultant has been using the MSC technique, andadapting it successfully for different contexts and methods of inquiry, for over ten years inqualitative and mixed-methods evaluations of community development programs.Collective Justice has offered to work with Barrio staff to design an evaluation andmonitoring program to assess the program’s efficacy. They have provided critical guidanceto help Barrio understand the role of non-CDFI community organizations in supportingmicrofinance initiatives. RecommendationsBarrio Alegría does not have the capacity in the short to medium term to launch amicrolending program on its own that includes the evaluation, processing, and servicing ofloan products. However, this Phase I feasibility study has identified a number of factors thatsuggest proceeding with Phase II. The CFF/Finanta merger and expansion of Affinity Grouplending circles means that a new lending product will be available in Reading provided by avery reputable CDFI with decades of experience in the region.The feasibility study hasrevealed an appetite for microlending products and identified several gaps in businesssupport service provision. Barrio’s community reputation and nationally-recognized creativeplacemaking activities positions them to support local entrepreneurs through theircommunity work.The Barrio Board has reviewed this Phase I report and believes that the recommendationsoutlined herein to partner with experts in the field in order to guide the financial processingand oversight of any future phases adequately addresses its capacity concerns related tostaffing, loan servicing and programmatic evaluation. With those elements in mind, thefollowing recommendations outline the key elements of a Phase II launch with the Barrio+model. 12

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Training. Collective Justice can design and deliver tailored training for staff andvolunteers on program monitoring, the MSC technique, and evaluationimplementation.Evaluation design. Collective Justice can design a mixed-methods and participatoryevaluation, centered around the MSC technique. ➢Recommendation #1: Pursue relationship with CFF/FinantaBarrio’s efforts are best served in supporting the expansion of the Affinity Group lendingmodel to Reading by spreading the word and cultivating potential Affinity Groups. TheCFF/Finanta Affinity Group lending program is already operational and provides a verystrong strategic fit. While focused currently in the greater Philadelphia region, CFF staff hasexpressed an interest in expanding the affinity group to the Reading market.This allowsBarrio to focus on its core strength in community outreach and relationship building, whileallowing CFF/Finanta to focus on its area of expertise: financial and business assistance tosmall and fledgling businesses. Barrio has already identified a group of entrepreneurs who are interested in pursuingfinancing for capital purchases for their businesses. However, Barrio Alegría does not havea core competency in the delivery of business support services and/or business technicalassistance, which is something for which CFF/Finanta is well known. Barrio’s strongreputation as a grassroots community organization positions it to be a consistent point ofentry for businesses operating on the fringes of the economy. Barrio should begin tocultivate relationships among these borrowers and support the development of an initialpilot Affinity Group. ➢Recommendation #2: Mobilize local artists to enhance local marketing effortsIn 2020, Barrio received a national placemaking award through the Center for CommunityProgress, and continues to design programs around using arts as a way to further stimulateeconomic development activity. We recommend that Barrio contract with local artists on acampaign that can integrate with Barrio’s larger creative placemaking plans and providemarketing support for affiliated local businesses. ➢Recommendation #3: Pursue relationship with Collective JusticeCollective Justice Consultants has a demonstrated capacity with microfinance evaluationprojects (as referenced above), and a mission that aligns with that of Barrio. By engagingthem, Barrio could establish a cost-effective approach to program design and evaluation.Collective Justice can work with Barrio staff to outline programmatic oversight and tooperationalize the implementation of the Most Significant Change Technique (MSC) toensure that Barrio captures relevant data related to project impact. Collective Justice is ableto provide the following specific services:13

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Technical assistance and support. Collective Justice can supervise and advise Barrioin implementing the evaluation.Analysis and reporting. Collective Justice can take a lead role in data analysis andreporting, including reporting back to evaluation participants, generating evidence-based conclusions and recommendations for future programs and supporting thedevelopment of case studies and best practices that can be shared with the largercommunity development microloan field nationally. Initial Loan Application. Involvement with continuing conversations with CFF/Finanta to better understandthe Finanta model and thus how to structure the affinity group support work. Revolving Loan Pool Program Evaluation oversight by Collective Justice. Establishment of an intersectional committee of Barrio Board, staff, and LeadershipDevelopment cohort members to support Most Significant Change data collectionand evaluation. ➢Recommendation #4: Support the development of key Barrio staff Fabiola Flores has demonstrated an interest and capacity to continue to coordinate theproject moving forward. She coordinated the focus groups, conducted a majority of theinterviews with business owners, and actively participated in team discussions about CDFIinclusion and strategic partnership. She is a natural fit for the role of community navigator.It is important to provide her with the appropriate training that she will need to succeed inher position. The following infrastructure should be in place to support her role:14

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