The Breakdown

Explaining Southern California's economy

Hello Kiva! Villaraigosa welcomes microlending to LA

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Los Angeles Mayor Antonio Villaraigosa made a stop in South L.A. this morning to celebrate a small business — Café 22, a healthy food eatery across the street from L.A. County USC Medical Center — and welcome a new financing opportunity aimed specifically at small business to town: Kiva.

Kiva is a non-profit service that connects donors with needy entrepreneurs around the globe. They don't make the loans; they facilitate the relationships. As its president (and former PayPal executive) Premal Shah said, they're like the of microfinance, enabling small-scale philanthropists to get money into the hands of businesspeople who have a tough time getting loans from big banks. 

To do this, Kiva works with "field partners" — lending organizations around the world. Kiva takes businesses, individuals, and often in the developing world, women's labor collectives, and posts their pictures and business needs online, along with a loan amount. People can then use Kiva's website to contribute money, which the lendees then pay back over time. In the developing world, these loans are typically very small, and they're funding by people making $25 donations which they have the option of "reinvesting" after payback — or re-loaning to a new business. 

In L.A., Kiva is partnering with the Valley Economic Development Center, a non-profit that specializes in regional microfinance. VEDC's President, Roberto Barragan, was also on hand for the event at Café 22. Kiva has already rolled out its online crowdfunding microfinance model in two other cities, Detroit and New Orleans, calling it "Kiva City." According to Shah, it was attracted to Los Angeles because so much of the business economy is made up of small businesses — we're the "epicenter of small business," as Villaraigosa put it.

But we're also the epicenter of high unemployment. We lost more than half a million jobs during the Great Recession and haven't even come close to getting them all back. And given that we have far fewer Fortune 500 companies than we used to, we rely on vigorous small business creation to take up the slack. In fact, as both Shah and Villaraigosa noted, if we could provide the funding for one in three small businesses to hire just one new worker, we could erase much of our jobs deficit.

Ah, the funding... That's the problem area. Big banks don't want to lend to small businesses right now, both because it's too hard for them to make money off small loans and because they have to hold too much capital in reserve to satisfy regulators to make it worthwhile. So small businesses like Café 22 hear "No, no, no" a lot. 

That's where Kiva comes in. Café 22 had already done one loan with VEDC, after several banks told them — it's a husband-and-wife team, Jessie Monroy and Edwin Bel Rosale — that they couldn't do restaurant loans because the restaurant business was simply too risky. Their Kiva loan will be used to buy equipment and hire a delivery person to expand operations. 

It's not going to be a big old honkin' loan, which is typical for Kiva City. In L.A., VEDC has been authorized to do $700,000 in loans through Kiva, with an average size of $7,000. The interest rate will be around 8-12 percent, which isn't low, but it's better than no loan at all. And it's far less than what some Kiva partners in the developing world ask for. Kiva has been criticized for working with developing-world field partners who charge interest well above 20 percent, in some cases.

(Another business, Bety Paleteria, which operates a fleet of small ice-cream carts and also received funding through Kiva, was on hand for the event.)

Kiva doesn't make any money off the loans itself. "We live off tips," Shah said. That is, donations from users who enjoy the process and want to support it. He also said that he hopes to see Kiva City businesses "graduate off Kiva and go to the banks" — the very banks that wouldn't grant loans in the first place. "We're at the edges of where the banks are," he added.

I'm a Kiva donor myself. I've made two loans over the past few years, one to a Lebanese fish merchant and another to a company that rebuilds warehouse pallets and that's doing business in both Mexico and Texas. I like the idea of Kiva as a way to do "microphilanthropy," but as I told Shah, I'm intrigued by the possibilities for cutting donors in on a more tangible return, perhaps by giving them equity in either Kiva or its partners. I think this would be technically difficult, given the generally non-profit status of both. But I'm not sure returns would have to be financial. There could be some sort of credit program that can be converted to donations, sort of like frequent flyer miles. 

UPDATE: I went on "AirTalk" on Wednesday to talk about Kiva City LA with Premal Shah and Angela Stanislawski of VEDC. We had an interesting discussion and Premal's arguments in favor of microlending convinced Larry to become a Kiva donor (maybe).

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.


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