Testimony before the U.S. House of Representatives
Banking and Financial Services Committee
Ellen F. Golden
Chair, Board of Directors
Association for Enterprise Opportunity
May 26, 1999
On behalf of the Association for Enterprise Opportunity I would like to thank Chairman Leach and the distinguished members of the Committee for convening this hearing on microenterprise development and the Program for Investment in Entrepreneurs Act (the PRIME Act). I am Ellen F. Golden, Chair of the Board of Directors of the Association for Enterprise Opportunity (AEO) and Senior Program Officer, Microenterprise and Womens Business Development, Coastal Enterprises, Inc. (CEI), Wiscasset, Maine.
While I am here speaking on behalf of AEO, I am also a microenterprise development practitioner. CEI is a private, non-profit community development corporation, established in 1977, whose primary activity is to provide financing and technical assistance to small and microbusinesses that provide income, employment and ownership opportunities to low income residents of Maine. CEI also develops special needs and affordable housing and engages in research and policy work. Overall, CEI has provided $57 million in financing to nearly 900 small businesses, leveraged an additional $150 million in public and private financing and created or retained 10,000 jobs.
CEI has been active in the area of microenterprise development since the early 1980s when CEI invested in natural resource based industries. In the mid-1980s, CEI formalized and expanded its microenterprise development activity and created the Enterprise Development Fund. Since that time, CEI has provided $5.6 million in loans of $25,000 or less to 465 microbusinesses at an average loan size of $12,000 and training and technical assistance to 8000 existing or aspiring entrepreneurs. Within its microenterprise development activity, CEI has targeted low income, welfare recipients, unemployed, refugees and immigrants, women, small producers and select social services, such as child care.
AEO supports the PRIME Act because the legislation responds to two areas consistently identified by our members as central to the development of the microenterprise industry: technical assistance for low income entrepreneurs and capacity building resources for community based, microenterprise development organizations.
The Association for Enterprise Opportunity
AEO is a national non-profit 501(c)3 association of organizations founded in 1991 to meet the needs of the dynamic and growing field of microenterprise. A microenterprise is a sole proprietorship, partnership or family business that has fewer than five employees, does not generally have access to the commercial banking sector, and requires a loan of $25,000 or less to start up or expand.
The industry of microenterprise development emerged in this country to address the unmet needs of the smallest businesses who were unable to obtain access to conventional business development resources. Microenterprise development embodies a holistic approach to economic development and encompasses a full range of services to meet the needs of microentrepreneurs - training and technical assistance, access to credit, access to markets, and economic literacy and asset development.
AEO has grown with the industry. From an organization of 100 pioneer programs, AEO has become a network of 500 members representing community economic development programs, social service providers, support organizations and funders. Even as it expanded and diversified, AEOs mission has remained constant: to provide members with a forum, information, and a voice to promote enterprise opportunity for people and communities with limited access to economic resources.
Seven years ago, microenterprise development was considered the province of a few dozen struggling programs; today more than 700 programs are operating across the country and more are being added each day.
The Microenterprise Development Industry
One of the most striking features of the US microenterprise industry is its diversity. A wide range of institutions are involved in microenterprise development programming - including stand alone microenterprise development organizations, community development corporations, loan funds, community action agencies, community development banks or credit unions, as well as federal, state and local government agencies. While most microenterprise development organizations target their programs to low income individuals, the goals and outcomes of individual microenterprise organizations vary with the needs of their communities. Some programs stress job creation, business and community development while others focus more on poverty alleviation, human capital development, and asset development for the poor.
This past year, AEO collaborated with the Aspen Institutes Self Employment Learning Project to update the directory of US microenterprise programs. The 1999 directory is the most accurate source of information on microenterprise programs in the country. In putting the directory together, 342 microenterprise programs were surveyed, including 281 practitioner organizations. The survey results help illustrate what the industry looks like:
92% of the practitioner programs provide technical assistance and training services to entrepreneurs and 72% provide credit services.
64% of the practitioner programs provide both lending and technical assistance and 28% provide only technical assistance and training.
91% of the practitioner programs surveyed target low income individuals as part of their mission.
71% of practitioner programs report that providing more advanced training and technical assistance is a high priority.
64% of the programs have a client base made up of at least 50% women and 7% of the programs serve only women.
A large number of the programs are under three years old, while a few are more than ten years old.
As the survey indicates, most microenterprise development programs target their services to economically disadvantaged entrepreneurs. The needs of those populations influence the shape of a program and the services that are delivered. Programs that target persistently poor individuals on public assistance have a heavier focus on training and support services than a program working with existing business owners that lack access to credit.
CEIs experience illustrates the influence that the market has on program design. As a general rule, CEI provides one-on-technical assistance supplemented by workshops and seminars. However, CEI has adapted it services to provide more specialized and intensive assistance to specific populations. For example, in working with welfare recipients, CEI provides an expanded services: intensive entrepreneurship training, individual business counseling, mentoring, peer support and access to credit. For low income women exploring the start up of a business, CEI has a nine-hour program that offers the opportunity for personal as well as business exploration. Finally, CEI has developed an entrepreneurship training program for non-native English speakers that is combined with individualized lab sessions to ensure that key principles are understood and applied to individual business activity. When working with microenterprises, it is impossible to separate personal from business issues. Each of these programs must take many factors into account as they support individual aspirations for business ownership. The value of this approach is made visible as disadvantaged individuals generate income and build assets as a result of their enterprises.
Although microenterprise practice now points to four elements of a comprehensive microenterprise program: training and technical assistance, credit or access to credit, access to markets, economic literacy and asset development, programs incorporate these elements in different ways. Programs provide varying amounts of training and/or technical assistance in preparation for helping clients get access to credit; others concentrate on the provision of credit. Many programs are discovering that the majority of their customers need help to manage their businesses and do not have immediate credit needs at all.
The diversity of the microenterprise development industry presents a challenge when it comes to public policy because the variation in program design and community need prevents microenterprise development from fitting neatly into the jurisdiction of any single federal agency or congressional committee. Different organizations have very different needs.
A Policy Agenda for the Microenterprise Development Industry
AEO members have been actively involved in policy work - both at the state and federal level - since the organization was founded eight years ago. AEO is a member driven organization and our members, most of whom operate microenterprise development programs in poor communities, see the direct connection between their work as practitioners and the role they can play in educating policy makers and the public at large.
Several of AEOs founding members, including the Womens Self Employment Project (WSEP) from Chicago, Institute for Social and Economic Development from Iowa, WomenVenture from Minnesota, and CEI, worked with Senator Dale Bumpers (D-AR) in crafting the initial proposal for the SBA Microloan Demonstration. In 1991 when discussions about the SBA Pilot started, members of Congress and the SBA were skeptical. Could nonprofit organizations successfully make small loans to low income individuals to start or expand businesses? Would the loans be repaid? Could a loan of less than $25,000 really have an impact? Do community based non-profits have the capacity to administer loan funds and provide business training and technical assistance to small entrepreneurs?
Eight years later we can point to the success of the program. There are currently 129 lending intermediaries and 19 non-lending technical assistance intermediaries participating in the SBA Program. Collectively they have made more than 7,900 loans to microentrepreneurs totaling approximately $80 million. The average loan to a business is roughly $10,000 and the SBA has not incurred a single loss in the nearly seven years they have administered the program.
The SBA Microloan Program was initially authorized as a pilot demonstration; two years ago, Congress voted to expand the program and grant it permanent program status. The
SBA Microloan Program is a critical source of funding for the industry. AEO will continue to advocate that the program be expanded to ensure national coverage and that it be fully funded to ensure that adequate technical assistance is available to its borrowers. I think the SBA would agree that AEO has been the programs strongest advocate and supporter.
I would like to briefly point to some of the other work that AEO has done to encourage a policy environment that is supports microenterprise development.
AEO has in the past advocated for the authorization and funding of the CDFI Fund and supports HR 629 which would reauthorize the Fund.
AEO worked to ensure that entrepreneurial training and self-employment were recognized activities under the Department of Labors Welfare to Work Initiative.
AEO worked to see that Community Development Block Grant funds could be used to support microenterprise development activities.
AEO is working with traditional financial institutions as well as bank regulators to encourage partnerships with microenterprise development organizations.
AEO has worked with both the SBA and the CDFI Fund at Treasury to encourage the work of the interagency task force on microenterprise development.
AEO worked for the permanent extension of the Self Employment Assistance Program (SEAP) which permits states to pay self-employment stipends out of unemployment insurance (UI) funds to eligible UI recipients who want to start their own businesses.
Just as conventional lenders constantly search for better ways to develop business, improve their product and reach new markets, the same is true in the microenterprise development industry. We have enough experience and data now to be able to identify what is needed to enable practitioners and programs to effectively meet the needs of low income entrepreneurs.
AEO supports the PRIME Act because it addresses needs that our members have consistently identified as priorities for the industry - technical assistance funding for low income entrepreneurs and support for capacity building activities targeted to microenterprise development programs.
Program for Investments in Microentrepreneurs Fund (The PRIME Act)
The idea of creating a fund to support the technical assistance needs of low income entrepreneurs emerged from the work of AEOs Policy Committee in partnership with a number of microenterprise development and support organizations including RESULTS, the Corporation for Enterprise Development, the Aspen Institute, FINCA USA, Working Capital, and members of the CDFI Coalition.
This working group identified three areas where additional investment was needed to ensure that low income entrepreneurs could access the types of services they needed :
Over a period of months last summer, this working group developed a proposal designed to address the training needs of low income microentrepreneurs and build the capacity of nonprofit microenterprise organizations. We shared the proposal with Senator Edward M. Kennedy (D-MA) and Senator Pete V. Domenici (R-NM), both of whom have been strong supporters of the microenterprise industry and understood the particular challenges faced by low income entrepreneurs. In June, 1998, Senators Kennedy and Domenici and Congressman Bobby Rush (D-IL) introduced the PRIME Act into the 105th Congress. The bill was reintroduced into the 106th Congress with strong bi-partisan support in the Senate and the House, and I would like to thank Chairman Leach for his leadership on PRIME.
The PRIME Act creates a new program at the Community Development Financial Institutions Fund (the CDFI Fund) dedicated to building a network of non profit community based institutions that can effectively provide training and technical assistance to low income entrepreneurs.
I would like to focus briefly on the two key components of PRIME - technical assistance and capacity building.
Training and Technical Assistance Funds: The majority of PRIME funds would be targeted to nonprofit microenterprise development programs to provide intensive technical assistance and training to low income entrepreneurs.
Most existing funding for microenterprise programs - especially at the federal level - is credit related. In fact, the industry is often incorrectly referred to as "microcredit" despite the fact that credit is only one of the barriers faced by low income or emerging entrepreneurs. One of the clearest lessons of the first decade of microenterprise development in this country is that credit without training and technical assistance is of limited success. This is especially true for programs that target low income and disadvantaged entrepreneurs who require higher levels of intensive technical assistance, training and support.
The more disadvantaged the population being targeted by a microenterprise development program, the more training and technical assistance are essential. Steady funding for technical assistance and training is one of the most expensive elements of a microenterprise program and organizations consistently identify funding for technical assistance and training as the primary funding need in the industry. However, no federal program currently provides funding to support the training and technical assistance needs of microenterprise development organizations that target very low income entrepreneurs.
A second significant lesson from the field is that many microenterprises will require training and technical assistance quite apart from any credit needs. In any given year, CEI provides technical assistance to many more microenterprises than it finances. One example is Mary, a single woman from a small town in midcoast Maine, who operates a small manufacturing enterprise that produces fabric fashion accessories. She approached CEI for assistance in 1996 when her business started to shrink, leaving her with a $3800 loss. Mary has received intensive individual assistance and training in subjects ranging from recordkeeping, bookkeeping, personnel, inventory, marketing, and business applications of the Internet. She has also joined a CEI-sponsored peer group that meets every six weeks to provide encouragement, support and business advice. This past year her business showed a profit of $20,000 and she increased her personal income from $12,000 to $16,000. She is continuing to work with CEI as she learns to manage her now growing business.
All of the funding authorized by PRIME would be targeted to low income individuals and economically distressed areas as defined by the CDFI Fund and at least half of the PRIME funds must be used to benefit very low income individuals- those at or below 150 percent poverty. This targeting criteria would ensure that the hardest to reach entrepreneurs would be served by the program. The targeting also distinguishes PRIME from other federally funded technical assistance funds that are not strictly targeted to low income individuals and therefore rarely reach this population.
Let me be clear that AEO is a strong supporter of existing business assistance programs including the SBAs Womens Business Centers and the Small Business Development Centers (SBDCs). While these programs do provide critical assistance to entrepreneurs and small businesses, they tend to serve more established businesses rather than the very low income individuals that microenterprise development programs would be required to serve under PRIME.
My colleagues will talk more about the impact that microenterprise development programs working with very low income entrepreneurs can have and the way that these programs offer ongoing support to entrepreneurs.
Capacity Building Funds: At least 15 percent of the PRIME funds could be used to provide training and capacity building services to microenterprise development organizations and programs.
AEO has seen a dramatic increase in demand for training and support activities as the industry expands. Some of the mature organizations, those that have been in operation for five years or more, are in need of training and support as they try to move into the next phase of programming or try to more effectively serve their low income target population. These mature microenterprise development organizations are now looking for ways to help their business clients graduate from survival mode to growth mode. In addition, some of these microenterprise development organizations are looking at ways they can assist their entrepreneurs access markets. Organizations are looking for ways that they can provide more sophisticated training in marketing and sales concepts to the entrepreneurs they serve. They are looking for creative ways to support the development and distribution of joint catalogs, facilitate Internet access or promote participation in trade shows and trade missions. The efforts of these mature microenterprise development organizations to expand their services would be supported by PRIME.
The training needs for new and emerging microenterprise development organizations are quite different. Many of these new programs are being started by organizations who have not traditionally been involved in community economic development, for example, housing and social service organizations. What these groups are finding is that the microenterprise development strategy is one that can be imported into the current mix of services they offer clients. Organizations like the National Urban League are encouraging their 115 affiliates to become more involved in microenterprise development. Organizations focusing on other targeted populations are also beginning to add this programming. For example, the World Institute on Disability, with whom AEO collaborated on a meeting on the topic of self-employment for people with disabilities, works with numerous organizations who are looking to add microenterprise development programming and who could benefit from capacity building initiatives like PRIME. PRIME can also help leverage other funding for these organizations, particularly when partnerships are formed between public vocational rehabilitation programs and private organizations like banks and disability organizations.
There is a very strong peer to peer learning network in the microenterprise industry and we as practitioners utilize the expertise of our colleagues on a regular basis. What we lack are the resources to effectively share this wealth of knowledge with the many individuals and organizations that are not part of the informal network.
There is currently no federal program that invests in developing and strengthening the network of community based, nonprofit microenterprise development organizations. I use the term investment because targeting funds to this type of capacity building activity will have a significant long term pay off. PRIME funds would be invested in the community based institutions most able to respond to the needs of low income entrepreneurs.
AEO would also like to see some of the PRIME capacity building funds used to expand the number of intermediaries participating in the SBA Microloan Program. While the SBA currently has at least one intermediary in each of 46 states their goal is to expand the program to make it available in all areas of the country and expand the number of intermediaries to 200 by the year 2000. We think PRIME funds would help the SBA reach this goal.
AEO is confident in the CDFI Funds ability to effectively administer a capacity building program targeted to microenterprise development organizations. As an institution the CDFI Fund has continually demonstrated their understanding of how community based organizations work and the support that such organizations need to thrive. In addition, the Funds experience overseeing the Presidential Awards for Excellence in Microenterprise Development has given them a unique insight into the industry.
The Big Bold Goal for the Microenterprise Development Industry
In closing, I would like to talk a bit about where we as an industry are going.
During the 1998 AEO conference held in Washington, D.C. and attended by more than 1,000, AEO launched the "big bold goal" for the US microenterprise industry. The goal - to help one million low-income and disadvantaged people become self sufficient through self employment in the next decade.
This is by all counts an ambitious goal and yet we believe it is attainable if indeed - We All Work Together. Collaboration and partnerships have been a centerpiece of the microenterprise industry from the start. With support from AEO's numerous public and private sector partners, such as The National Urban League, the National Congress for Community Economic Development, Corporation for Enterprise Development, Bank One, Nations Bank, and federal agencies including the Small Business Administration, the Department of Housing and Urban Development, the Department of Treasury, and others, the big bold goal can be achieved. The resources that PRIME would make available to the industry are crucial in making this goal a reality.
In closing, I would like to share the story of one of our clients - a young woman on welfare with a dream of business ownership. In 1992, Susan enrolled in a program targeted to welfare recipients where she received training, individual business counseling, and mentoring and also participated in a peer networking group. All too aware of the precariousness of her financial situation, Susan chose to bootstrap her business start and avoid incurring debt. Her residential cleaning business which uses only environmentally friendly products has not only enabled Susan to get off welfare and support herself and her children for the past five years, but it has enabled her to raise her aspirations higher than she ever thought possible. Thanks to the skills and confidence she has gained from successfully operating her business, she is planning on returning to school to prepare herself to open a second, potentially more lucrative business. It is for people like Susan and the organizations that support them that I ask that the Committee consider authorizing the PRIME Act before the 106th Congress adjourns.
Thank you again for the opportunity to testify today and I am happy to answer any questions.
AEO 1999 Legislative Priorities
Organizational sign-on letter in support of PRIME