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Iowa’s leaders have long acknowledged a lack of financing and technical assistance for the state’s smallest businesses. This may be the year that some groups put their oars in the water and row a lifeboat to them.

Using a $1 million grant from the Northwest Area Foundation, a statewide consortium of Iowa community and business development organizations plans to launch a microloan and technical assistance program this year. The goal: helping Iowa’s microenterprises, businesses with five or fewer workers, to start or to expand.

The recently chartered nonprofit group, named the Iowa Foundation for Microenterprise and Community Vitality (IFMCV), will provide a statewide mechanism for Iowa’s microentrepreneurs to connect with community development agencies for assistance. Among the groups spearheading the effort are the Greater Des Moines Community Foundation and the Community Vitality Center (CVC), a policy analysis center based at Iowa State University.

Mark Edelman, the CVC’s director and president of the IFMCV’s board of directors, said the new foundation is nearly ready to submit an application to become a microlending intermediary through the U.S. Small Business Administration’s Microloan Program. That program specializes in providing short-term loans of $35,000 or less to small businesses.

At the same time, state legislators are considering ways to fund microenterprise assistance programs that would be offered through the Iowa Department of Economic Development. An appropriations bill now under consideration would provide $500,000 to fund a microenterprise specialist at the IDED and begin a microloan program, using unspent Grow Iowa Values Fund dollars.

“We really feel there hasn’t been enough done with microenterprise development and business start-ups,” said state Sen. Bill Dotzler, a Waterloo Democrat who chairs the Senate Economic Development Appropriations Subcommittee. “It’s really a pretty complicated issue, and we’ve been listening to the stakeholders from organizations around the state and are trying to put together something that would work for everybody.”

Dotzler said last week that he intends to include the $500,000 request to fund pilot microloan projects as part of a riverfront redevelopment appropriations bill he will introduce. In a tight year for state funding and with little time left in the legislative session, that proposal may face an uphill battle.

Another large question mark is the extent to which the separate state and nonprofit initiatives will work together, rather than duplicate efforts.

Laying the groundwork

Microenterprises, which can range from one-person operations to small companies with up to four employees, provide jobs to more than 311,000 people in Iowa, according to U.S. Census Bureau estimates, or about 16 percent of the state’s work force. On a national basis, it’s estimated there are more than 24 million microenterprises, sometimes referred to as “mom-and-pop” shops, that fill a variety of service and retail niches. Given the right resources, another 10 million such microenterprises could be launched, according to the Association of Enterprise Opportunity, an advocacy group for microenterprises based in Arlington, Va.

Over the past year, the Community Vitality Center has been laying the groundwork for the foundation. Its research has included inventories of existing programs, including those in other states, as well as surveys of lenders and small business technical assistance organizations across Iowa. The result was a business plan for a demonstration project.

“The purpose of (the foundation) is to provide statewide access, to provide a mechanism for people who want to contribute on a philanthropic basis to supporting entrepreneurs or to support community vitality,” Edelman said. “Part of the vision, once it’s established, is to work with community foundations across the state to build capacity for microenterprise actitivities.”

The business plan calls for the IFMCV to select four nonprofit organizations that would receive funds from the foundation to begin regional microlending demonstration projects. It also calls for creating incentives for community foundations to develop fund-raising efforts to help communities sustain those microenterprise assistance programs.

In a survey of 68 Iowa bank executives last year, the Iowa Bankers Association found that more than two-thirds of those financial institutions were interested in establishing regional projects for assisting microbusinesses. According to that same survey, the majority of loan requests by start-up businesses in their communities were for less than $50,000.

Another indication of the potential demand for a statewide microlending program, Edelman said, is the number of inquiries fielded by the only existing SBA Microloan intermediary in the state, which operates in a six-county area of northwest Iowa.

In both the potential state-funded program and the nonprofit model, organizers say they’re focusing on using infrastructure that’s already in place to do the job. On the legislative side, Dotzler said he’d like to make available four to five grants of $80,000 for established community development organizations to use for microenterprise support. Similar to the IFMCV’s approach, the initiative would partner with existing organizations.

“There are (community) groups out there looking for ways to raise people out of poverty,” he said. “We think starting a small business is one of the best ways to do that.” Having one central organization to work with in Iowa would make it easier to apply for federal programs such as the SBA Microloan Program, Dotzler added.

Using a similar approach, the IFMCV will work with community foundations and other nonprofit organizations across the state.

“A lot of the community foundations in Iowa are more used to doing more traditional foundation work, such as human services and health,” Edelman said. “When you get into the areas of economic development and entrepreneurship, there are certain things you can and cannot do. Part of the purpose of this (foundation) is to hone our skills so that these organizations will know they will be in compliance if they get into this area.”

The Northwest Area Foundation grant provides the 15 percent local match required by the SBA for the IFMCV to become a microloan intermediary.

“A requirement of the grant is that the money be used to invest in poverty-reduction programs, primarily rural, in the state,” said Johnny Danos, president of the Greater Des Moines Community Foundation. The $1 million is a portion of a $3 million donor-advised fund established by the St. Paul, Minn.-based foundation in 2000. The Northwest Area Foundation serves an eight-state region that includes Iowa.

Working with its more than 30 affiliate community foundations across the state and the Community Vitality Center, Danos’ organization re-granted the money to the Community Vitality Center to establish the microenterprise foundation. Approximately half the funds will be used to provide technical assistance, and the other half to seed a microloan fund, he said.

A long-term goal is to attract a continuing stream of funding from government, corporate and nonprofit sources to sustain the work of the IFMCV.

“At the end of the day,” Danos said, “we hope to demonstrate that we can raise money to lend to these types of small businesses.”

Statewide demand

Though the SBA Microloan Program has been in existence for about 16 years, only one small pocket of six counties in the northwest part of the state has used it in Iowa. Siouxland Economic Development Corp. in Sioux City was one of the original pilot organizations for the program in 1992. It has since provided microloans to nearly 200 microenterprises from a number of funding sources, including approximately $1 million in SBA microloans to 94 businesses.

“We receive telephone calls on a regular basis from (microenterprises) throughout Iowa who want assistance,” said Ken Beekley, Siouxland’s executive vice president. “But we can’t help them cost-effectively from one corner of the state, and the farther away you are, the less familiar you are with the circumstances.”

Forming a statewide framework will enable regional organizations to offer programs throughout the state in a more cost-effective manner, added Beekley, who now chairs the microenterprise foundation’s board.

Beekley said he’s not surprised that other organizations haven’t stepped up to offer microloan programs in Iowa. Administering a microloan program is “a pretty labor-intensive program because you’re dealing with small-dollar loans,” Beekley said. “And it’s pretty fragile; a lot of things can go wrong. A lot of organizations may have chosen not to make that investment in time and effort.”

Siouxland’s program currently manages a portfolio of more than 50 microloans, about half of which are less than 3 years old. Only two loans in that portfolio are delinquent, he said. Retail and service businesses are the most common types of microenterprises Siouxland has assisted, using multiple funding sources, he said.

“We probably have done as many start-ups as existing businesses,” Beekley said. “Start-ups are a large portion of what you finance through this program because of the (employment and loan) size limitations.”

Offering microloans on a statewide basis will be “a very unique structure,” said Joe Folsom, state director for the SBA in Iowa. “Within the SBA Microloan Program, we are not aware of any statewide delivery of a program,” he said. “Typically a program will serve a region or multi-county area, but not a whole state.” Currently, 42 states have active SBA microloan intermediaries.

Dotzler said he believes the state’s initiative “won’t bump heads” with the nonprofit venture.

“I think that (the IFMCV) may want to apply for these (state) grants,” he said. “I think it’s a positive thing they’re doing. … I think it will be easy for these community-based organizations to adjust so they’ll be eligible for the dollars in the grants,” he said. In many instances, he added, the community-based organizations are more in tune with the needs of the microenterprises than the economic development organizations.

Chuck Palmer, president of ISED Ventures in Des Moines, said he believes the state and nonprofit programs will be complementary.

“In both cases, it expands options, so I think that’s important,” he said.

Founded in 1987, ISED Ventures has worked with about 10,000 clients, and has helped about 2,200 microbusinesses start, expand or stabilize. Palmer said his organization in recent years has seen “an explosion of small businesses” in Des Moines, particularly within the Hispanic and refugee populations. ISED Ventures has helped about 25 percent of those new businesses secure funding, and another funding source will be welcome.

“I’m really pleased to see the recognition at the state level for the importance of both technical assistance as well as finance,” Palmer said. “I think it’s an area that’s been off the radar screen for quite a while.”