Wednesday night in New York, Kiva took the wraps off its nationwide platform for zero-percent-interest small business loans—with a little help from former President Bill Clinton and PayPal CEO Daniel Schulman.
The launch means more small businesses can have a shot at obtaining such microloans, filling some of the gaps in the financing needed to get new ventures off the ground.
Kiva is a San Francisco-based nonprofit that aims to tackle poverty around the world through microlending. The organization gets its funding from foundations and other backers.
Folks can put in as little as $25 towards providing zero-percent-interest loans to others in need, take the money back once it has been repaid, or they can put it towards someone else’s loan. Kiva, founded 10 years ago, has also offered loans to small businesses in select cities around the country, particularly those from underserved demographics who have a tough time getting traditional financing from banks.
Premal Shah, Kiva’s president and co-founder, said the organization began operating in New York three years ago, reaching diverse parts of the community. “In New York, there’s over 200 small businesses that have received loans from 12,000 people here,” he said. Of those businesses, 55 percent are run by women, 65 percent ethnic minorities, and half have been in operation for less than in one year.
Small businesses that want to pursue a microloan through Kiva must first secure backers from friends and family before they are listed for the broader community to potentially finance. An early supporter of Kiva, Clinton cited a need for such collective backing for small businesses. “I think it would be better if a whole nongovernmental sector could be funded by massive numbers of people in small amounts of dollars,” he said.
Kiva, Clinton said, is about empowerment and positive identity politics, reaching across sociopolitical divisions to give others a chance to pursue their ambitions. He related this character-based lending model to what he saw growing up in Arkansas, where his grandfather ran a small store and some locals did not have money upfront to feed their families—despite working long hours. “He kept a little notebook, and if he knew they were working hard and doing the best they could, he lent them food,” Clinton said, “which they paid back.”
Given the transactional costs of traditional banking, he said, very small loans can be prohibitive. Microcredit is a space where this type of crowdfunding can play a role, Clinton said. “The world needs positive identity . . . and a system of inclusive universal empowerment,” he said. “That’s why Kiva is so important.”
PayPal’s Schulman reiterated the need for Kiva to help connect tiny companies with the early financing, especially for folks who have ambition, but limited resources to act. His company is a supporter of Kiva, which uses PayPal to collect and distribute funds for the loans. Schulman expressed a desire to put an end to the idiom that it is expensive to be poor. “For the typical individual who lives on the fringes of our financial system, they spend 10 percent of their disposable income, hard-earned money, on unnecessary fees and interest rates,” he said. “That is crazy. That’s the same amount they spend for food.”
One of the roadblocks for some small businesses seeking early financing, Shah said, is banks typically want to see at least three years of operational history before approving loans for companies. In contrast, the Kiva Zip program is character-based, he said, where small business owners ask 10 to 20 friends and family to invest $25 each, which then gives the small business the footing and access to the rest of Kiva’s lenders.
Some 95 percent of the small businesses listed on Kiva Zip raised money within 30 days, Shah said, and more than 90 percent paid their loans back in full. “We’re now ready to take this program national,” he said.
On hand at the event were some local businesses, many from the food, apparel, and accessories markets, which have used Kiva. Josh Wessler, CEO of Fresh Routes, said he first participated in Kiva as a lender before seeking funds himself. New York-based Fresh Routes creates cooking kits, with food and ingredients from local sources, for making meals at home.
The meal kit space is seeing a lot of players such as HelloFresh and Handpick racing to the dinner table. Wessler said getting financing through Kiva helped advance his plans to redesign the packaging for Fresh Routes and to spread the word to get his goods in more grocery stores. “We are asking people to support and believe in us, but we’re also telling them we’re going to pay them back,” he said.
Shah spoke with me after the formal part of the event, and said some 80 percent of small businesses that apply for loans get rejected, leaving a sizeable group looking for financing. He said some of the chief ways entrepreneurs try to address this issue include looking to crowdfunding such as Kickstarter and Indiegogo; alternative lenders, such as OnDeck; and peer-to-peer lending marketplaces such as Lending Club and Prosper. “If you can get a loan from one of these go for it,” Shah said.
But those options do not work for everyone. Kiva operates in a different niche, he said, and can serve as an entry point for people who do not yet qualify for lending from those sources or traditional banks. “We want to sign partnerships with all of them and be that $5,000 or $10,000 seed loan,” he said. “Then you graduate to these other lenders.”
Shah also wants to bring Kiva’s strategy to other countries to support more small businesses. “I would love for this model of social underwriting, people vouching for people, to go abroad,” he said, “where the interest rates are really high. We can bring them down through this character-based lending system.”
