Opportunity Fund offers micro lending to help small Bay Area businesses succeed

Every weekday morning at quarter to six, Erica Del Toro, 33, greets the early morning administrative staff in the one-room office that serves as headquarters of the Fruitvale district cleaning company where she works. She heads to the small supply room in the back, stocks up on cleaning supplies and picks up a canvas envelope bearing her name.

The envelope she collects has been stuffed with her work assignments for the day—mostly private homes in Oakland, occasionally a small office—and Google Map directions to each, printed out the day before by the office staff. By 7 am, Del Toro is back in the car with her cleaning partner, 26-year-old Alejandra Arceo, both of them wearing standard-issue green t-shirts beneath matching aprons emblazoned with the company logo. On the surface, the pair could be any number of immigrant Latina house cleaners setting out to tidy the homes of Oakland’s more affluent residents.

But, unlike many of their industry peers, the women don’t earn an hourly wage—and they certainly don’t answer to the folks in the office who coordinate their assignments and cut their paychecks. Del Toro and Arceo are business owners. They are paid in profit. They set their own hours. And their company—the East Oakland cooperative, Natural Home Cleaning Professionals—nets $1.4 million dollars in annual revenue—a decent chunk of change, even if it is split between the 35 worker-owners.

The women are hardly millionaires. Once profits are split, each earns between $26,000 and $36,000 per year, after taxes. But for Del Toro and Arceo, both of whom earned just $8 per hour cleaning hotels before joining the co-op, the difference between being an employee and an owner is monumental.

Del Toro, a single mom, earns nearly $20,000 more per year than she used to—a gargantuan leap towards financial security, in her opinion. With the extra income, she upgraded from the clunker she used to drive to a 2004 Chevy Malibu. She moved herself and her two children into a bigger, better apartment. She enrolled in a comprehensive Kaiser health plan package through the co-op. And two weeks a year, she takes her children on vacation, every day of which is paid.

Erica De Toro, 33, and Alejandra Arceo, 26, are co-owners of the cooperative, Natural Home Cleaning, along with 33 other women.

Arceo, for her part, dedicates part of her extra income to help her husband, who does asbestos clean-up for a construction company, pay the bills. But she puts much of it away for her two daughters, who are 4 and 9 years-old—for their forthcoming college educations, she said.

The company began eight years ago as an experiment in cooperative business and an exercise in micro financing. In 2003, eight Latina immigrants launched Natural Home Cleaning with a $14,500 loan from Opportunity Fund, a non-profit financial institution that provides microenterprise loans, business advising and personal savings programs to low-income Bay Area residents.

Opportunity Fund gave the women a 3-year microloan at 8 percent interest, which they used to secure office space and stock up on their signature eco-friendly cleaning supplies.

Though meager by conventional standards, the debt was an intimidating investment for the company’s original eight owners, according to Deb Goldberg, Natural Home Cleaning’s general manager.

“It was very scary for the members to take on that loan,” Goldberg said, though she  acknowledges that everyone was grateful for the unlikely financial support. “No one else would have banked this business,” she said. “This is a group of owners with no assets and no earnings history, basically. It was a leap of faith for Opportunity Fund to fund the business. But we got through that, paid off the loan, and have operated debt free ever since.”

Natural Home Cleaning is now one of 1,700 Bay Area small businesses initially financed by Opportunity Fund—one of the largest microenterprise development organizations in the nation.

Today, there are nearly 700 such organizations in the country. They have collectively assisted 116,944 small business owners, according to a department of the Aspen Institute that monitors the micro lending industry. And this microloan movement continues to grow as the number of microenterprises—businesses with less than five employees and start-up costs less than $35,000—increases. In California alone, 90 percent of businesses are classified as microenterprises, according to a study by the California Senate Office of Research.

Opportunity Fund was an early pioneer of microlending in the United States. Stanford MBA graduate Eric Weaver launched the organization in the early 1990s as a way to create economic opportunities for people who are typically excluded from the financial system because of poverty, race or gender.

“The financial system works well if you know the rules and how to play, but it doesn’t work for everyone,” says Caitlin McShane, Opportunity Fund’s communications director. “Eric wanted to level the playing field.”

Opportunity Fund, she says, gives everyone “a shot at making it for themselves.”

The organization provides small business loans (at a fixed interest rate of 8 to 12 percent) to low-income entrepreneurs who want to grow an existing business. According to McShane, they will consider just about anybody, with three caveats: The business owner must live in the Bay Area. They must have a solid plan for the money they’re requesting. And they must have a business—Opportunity Fund does not finance ideas.

At first, the organization was funded almost entirely by grants and philanthropic donations. Today, about half of its operating costs are covered with interest from loans, while the other half remains funded by contributions, as well as funding from the Small Business Administration and the American Recovery and Reinvestment Act.

Most of the entrepreneurs who seek business loans from Opportunity Fund are unable to secure financing with a for-profit financial institution because they lack collateral or savings, have a bad credit score, or face other barriers.

Sometimes the loan they require is so small and their projected earnings so slight, that their venture simply isn’t worth financing from the perspective of big banks, which, naturally, aim to turn a larger profit.

In general, black and Latino business owners have a particularly difficult time securing loans, according to a recent report by UC Berkeley’s Institute for Research on Labor and Employment. And, when they are able to secure financing, they tend to pay higher interest rates or receive smaller loans than their white counterparts, the report says. The report also states that if this kind of discriminatory lending were reduced, minority access to loans would increase by 20 percent and the resulting loans could create 14,000 new jobs.

Hazel Estrada, a new member of the WAGES cooperative network, practices Natural Home Cleaning’s eco-friendly cleaning techniques during a group training in Berkeley.

“Frankly, as a small business owner, it sucks to go into a bank and be told ‘No,’” McShane said. “And it’s really awesome when you somehow find your way to Opportunity Fund and we say ‘Yes.’”

McShane argues that Opportunity Fund’s nonprofit structure—which is equally dependent on contributions and revenue—allows them to finance a variety of small businesses with fixed interest loans and terms ranging from one to seven years, depending on the size of the loan. The less you borrow, the higher your interest rate; the more you borrow, the lower your interest rate. That system, McShane said, helps businesses pay off their loans faster.

“One lady paid us back in a week,” McShane recalled. “She needed the money to stock up on inventory before selling food at a street festival. So after she sold the food, she paid us back, and [she still] made a really nice profit.”

As for business owners who aren’t able to pay off their loans on time, Opportunity Fund loan advisers try to be flexible, according to McShane.

“We want the businesses to succeed,” she said. “Our team has personal relationships with all of our active borrowers. We see a really high repayment rate because we make it easy for them to repay, and because we don’t give them too much debt to begin with. As a result, our borrowers are loyal in paying us back, even if it means they have to turn off their cell phone one month to make that monthly payment,” McShane said.

Despite this, not all Opportunity Fund Loans are repaid in full. The company has an 8 percent default rate. Ten percent of the enterprises it finances eventually go out of business.

But those odds still beat the national average. In 2009, more than 17 percent of loans backed by the Small Business Administration failed, according to the Coleman Report, an independent analysis of SBA loan programs. And the East Bay Economic Development Agency found that in California, the survival rate for small businesses after five years is just 53 percent.

Within that context, Natural Home Cleaning’s wherewithal is particularly remarkable. Goldberg, Natural Home Cleaning’s general manager, attributes the company’s success to its cooperative business model—which was devised and, Goldberg says, “perfected” by a Bay Area nonprofit called WAGES in the mid 1990s.

WAGES began as a business incubator that provided small business start-up assistance exclusively to low-income Latina immigrants. A joint venture by a business school graduate and a social worker who, at the time, worked with low-income Latinas in the Bay Area, the organization sought to create entrepreneurship opportunities for Latina women who faced systemic obstacles to business ownership.

In 2002, WAGES incubated Natural Home Cleaning—helping its original eight members secure an Opportunity Fund loan by drafting the company’s first business plan and financial projections.

But when the co-op members launched the business, and subsequently signed onto the $14,500 loan with Opportunity, the risk—and the debt—was theirs alone. They managed to pay off the debt in three years and have since operated without any outside financial assistance.

Each Natural Home Cleaning member’s income depends on both how much revenue the company earns and how long they’ve been with the company.  All receive a “guaranteed early distribution of profit” on a biweekly basis. For members with at least four years of tenure, this usually averages out to about $31,000 per year, while their counterparts receive about 45 percent less than that. At the end of the year, the remaining profit is distributed to members in proportion to their seniority.

“When someone comes in as a member, the first thing they need is money to feed their family,” said Deb Goldberg, Natural Home Cleaning’s general manager. “Then after about a year, they realize how different this is, because of the profit-sharing. They can decide to buy a car or put away 5 percent to buy a house. The way they think about money changes over the years as women feel safe and know they can provide for their families.”

“Right now,” Goldberg added with a smile, “there’s a bit of a saving craze among the co-op members.”

Goldberg said that cooperative members acted as each other’s support system in the early days, which helped them succeed in the long run. In that respect, she said, cooperatives have an advantage that many other small business don’t.

“As a single business owner, you can feel isolated,” Goldberg said. “You shoulder all of the risk yourself and you don’t know exactly when you need help. It’s a trap many sole business owners fall into. When you share responsibility and have mutual support, it’s easier to know when you need to change things and when to ask for help.”

Whatever the formula, the result are clear. Natural Home Cleaning has grown in size and profit every year since its launch. Today, it serves 500 regular clients and 35 co-owners who earn between $26,000 and $36,000 per year—plus full health benefits, paid vacation and other employment perks. Since 2003, the company has also created 40 jobs.

With this track record of job creation and financial growth, it’s just the kind of economic stimulant that Opportunity Fund aims to foster with the $13.5 million in microenterprise loans it has dispensed between 1992 and 2010.

Maria Gambla, a new member of the WAGES cooperative network, practices Natural Home Cleaning’s eco-friendly cleaning techniques during a group training in Berkeley.

“Very small business are the ones that create jobs,” said McShane, referring to a recent report by the East Bay Economic Development Agency. The report, which examined economic development and job creation in the East Bay, found that most of the employment in the region is created by small to medium firms that employ between 3 and 100 people.

“These are really important businesses to fund,” McShane said. “But it’s those businesses that can’t get opportunities to grow in our financial system. Some will never be bankable because the cost structure is so prohibitive.”

When businesses like Natural Home Cleaning succeed against the odds, McShane argues, they not only create jobs but also bolster the Bay Area economy.

A study of Opportunity Fund’s economic impact completed by the independent consulting firm TXP confirms that each loan disbursed by the organization creates an average of 2.4 jobs and has a positive net effect on the local economy. Put simply, every dollar lent by the organization generates twice its value in total annual economic activity. The study found that over the last 15 years, $13.3 million in loans has spurred $22.2 million in economic activity, created $6 million in new annual wage earnings and generated $1 million in annual state and local tax revenue.

In the grand scheme of things, it’s small beans. The study acknowledges that most of those economic benefits occur over many years after a loan is disbursed, and probably aren’t immediately or directly felt by most members of the community.

But the investment’s impact is felt deeply by the business owners who receive the loans and the employees they are able to hire as a result.

The co-op members at Natural Home Cleaning saw their family income increase by 71 percent in their first year, according to a study by WAGES. That figure is particularly significant, as 43 percent of Latino households in the Bay Area are unable to meet their basic needs, according to UNICEF.

Other businesses are following the company’s lead. Another eco-friendly cleaning cooperative being incubated by WAGES in Contra Costa will bear the Natural Home Cleaning brand and make use of the company’s existing infrastructure to keep its own costs low during the first year of operation. “We’ll be independent businesses, united under the Natural Home Cleaning brand,” Goldberg said.

But the company hasn’t proven entirely immune to the business-dampening effects of the recession. Its growth rate dropped precipitously, from a steady 60 percent in its first six years to about 9 percent in the past three years, to just 4 percent this year. Goldberg attributes the decline to the rising cost of the company’s Kaiser health plan, which has increased 16 percent annually in recent years. But while the decrease prevents them from taking on new cooperative members this year, Goldberg said the women are nevertheless grateful that they haven’t lost money, or gone out of business, like many others small enterprises in the region.

The recession, in fact, has been a boon to the microloan industry, as fewer people are able to qualify for small business bank loans. Over the last year alone, Opportunity Fund’s lending increased 112 percent and continues growing, according to McShane. The demand for loans has increased so much recently that the organization must think of new ways to keep pace with its lending, she said.

“We’re scaling and the we need our philanthropic contributions to keep pace with our micro lending,” McShane said.

In an effort to do so, the organization last week launched the “1,000 Jobs Challenge,” a matching donation campaign that capitalizes on their finding that each new loan creates 2.4 jobs over time. By raising $300,000 in three months, the campaign posits, Opportunity Fund could indirectly create 1,000 jobs over time by financing 400 new businesses.

McShane hopes that, like Natural Home Cleaning, many of these newly financed businesses will be in Oakland.

“Oakland is a community that has an incredibly strong entrepreneurial spirit, stronger than some other communities in the Bay Area,” McShane said. “It’s also been hit really hard by the economic downturn and economic inequality across the board. If we can create wealth for the low income entrepreneurs in our backyards and provide jobs for themselves and their neighbors—that’s why we’re here.”

Opportunity Fund’s investment has impacted the women of Natural Home Cleaning very personally.

“My self esteem has gone up a lot,” Arceo said, adding that she now feels more important at home, simply because she’s able to contribute to her household.

“For me,” Del Toro chimed in, “it’s the whole idea that every kind of work can be dignified, even house cleaning—as long as you do it honestly and are being paid well for it.”