Not long after he was elected to the Kansas City, Mo., city council in 2011, Scott Taylor initiated a series of community meetings to learn from residents and business owners what local officials could do to stimulate economic development.
What he heard repeatedly, in 17 meetings around the city, was that mom-and-pop operations desperately needed help in obtaining financing. Many budding entrepreneurs told Taylor and his colleagues that they wanted to grow their businesses but were unable to do so because they didn't qualify for conventional bank loans.
From those meetings, the city established the KC Storefront Initiative. The program's aim: to make loans to small outfits—particularly those run by women and minorities—that aren't profitable enough or haven't been around long enough to get banks to extend credit to them.
Since the initiative's launch in mid-2012, more than 140 entrepreneurs have received a total of $1.2 million in financing through the program. More than half of the loans have been made to minority-owned businesses and roughly two-thirds have been made to women-owned firms in and around Kansas City.
"It is exceeding all of our expectations," says Taylor. "The money is going out to all types of businesses."
The loans are made by Justine Petersen, a St. Louis-based microlender that Kansas City officials recruited to run the program, but the city has played an active role in facilitating the loans. It donated space in two city business development offices to Justine Petersen lenders and, more importantly, contributed $110,000 to the microlender's loan-loss reserve fund.
Galen Gondolfi, the chief communications officer at Justine Petersen, says that while other cities support microlending efforts, few have made as tangible a commitment as Kansas City has.
"What Kansas City has done is unique," he says. "It made an investment in the loss reserve that has allowed us to leverage significant dollars."
The loans range from $1,000 to $50,000—the average loan amount in 2013 was $12,000—and interest rates are roughly 8.25% to 12%, depending on the borrower's credit history.
"There was pent-up demand when we went into the market and it has not abated," Gondolfi says.
"What we are seeing in Kansas City is what microlenders see nationally—a lot of informal businesses that are formalizing and businesses that were part-time operations becoming full time."
One such company is Garza's Goodies, a mom-and-pop outfit that sells chocolates and baked goods.
When its owners, Richard and Heather Garza, lived in Florida, they made the treats in their home and sold them at craft fairs or to individuals who placed orders. But when they moved back to the Kansas City area in 2010 to help care for an ailing relative, they began hunting for commercial space because laws prohibited them from operating a food business out of their home.
Richard Garza says he tried to get a bank to loan help him buy equipment and lease storefront space, but quickly learned that he didn't qualify for one.
"The bank said, 'Yes, we'd be happy to give you a small-business loan when you've been in business five years and you are making $250,000 a year gross,'" Garza says. "And we looked at them and said, 'If we were making that, we wouldn't need a bank loan.'"
The Garzas wound up getting funding from multiple sources. One loan came from the Hispanic Economic Development Corp., and two nonprofits, Vocational Rehabilitation of Missouri and Rehabilitation Services for the Blind, chipped in to help purchase manufacturing equipment. (Richard Garza gets around in a wheelchair and Heather is legally blind.)
They also received a $5,000 loan from Justine Petersen, which Garza's Goodies has used primarily to pay for rent and marketing. Richard Garza says he intends to apply for a "step-up" loan from Justine Petersen, in which he would refinance the existing loan into a larger one. He hopes to use the funds to upgrade the company's website.
Banks have a role to play in getting capital into the hands of budding entrepreneurs like the Garzas. Several banks in the area have contributed up to $10,000 each to Justine Petersen's loan-loss reserve fund, for which they receive Community Reinvestment Act credit, and they often refer business to Justine Petersen if they can't make a loan themselves.
"I'm keen on making connections with microlenders that provide loans that are too small for a bank to do," says Joshua Rowland, the vice chairman at the $97 million-asset Lead Bank in Garden City, Mo., one of the contributors. "If we don't provide those businesses with a sound foundation then we aren't doing our job."
The average repayment period for the Justine Petersen loans is three years, and the maximum is five years. The default rate is about 2% so far.
Taylor, the city councilman, says he hopes the program's success will encourage more banks to add to the loan-loss reserve fund. There's enough money in the fund for Justine Petersen to lend out $1.7 million, and the microlender is 70% of the way there in less than two years.
"My main goal is to get this $1.7 million out on the street as quickly as possible, and then to go back and expand the fund," he says.