Memphis Money: Community-based startups struggle to find capital beyond debt-based platforms

Unlike tech-based startups, whose high growth potential can lead to equity-based investments, community-based businesses in Memphis’ startup ecosystem and across the country are largely dependent on debt-based platforms, which can limit their growth.

According to the Brookings Institute, a Washington-based research group, this particularly affects women and minorities, whose rates of self-employment lag behind those of white males, and that inadequate access to financial capital is a major constraint on the growth of minority and women-owned businesses.

A paper published by the Institute says minority-owned businesses are about three times as likely to be denied loans as comparable nonminority businesses and minorities who are approved for loans tend to receive lower loan amounts and pay higher interest rates.

Access to lower-cost capital could be one solution, but the definition of ‘lower cost’ can differ wildly.

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“Low, for people with significant networks and access to capital underwriting and guarantees can be anywhere from zero to five percent [loan interest rates],” said Leslie Smith, director at Entrepreneurship-Powered Innovation Center (EPICenter), which measures the impact of entrepreneurial support to create a just, inclusive and growing Memphis economy.

Colby Midgett, owner of Premier Flowers at 10 North Second Street. (Renier Otto)

“And ‘low’ for folks who have different networks and capital resources and challenges can be anywhere from 10 to 20 percent [loan interest rates]. Your definition of ‘low’ changes when you’re looking at different types of programs.”

EPICenter is focused on supporting women and minority-owned startups across the spectrum, but Smith is intent on seeking solutions to support locally grown business that are struggling more significantly for capital.

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“We want to ensure people with great ideas and business concepts and all of the energy and enthusiasm to build amazing businesses here – who create place and employ people and develop wealth – are getting access to capital in the same flexible ways that other businesses are,” Smith said.

Women and minority-owned businesses face a more complex set of challenges, which Smith said includes more anxiety and distrust around taking on debt and building banking relationships, as well as a lack of confidence around pitching their product.

“…Women are more likely to limit promises around product capabilities and company growth potential, to be as close to the truth as possible,” she said.

“Their male counterparts are very happy living into the audacious potential, which then breeds this really interesting confidence about the business.”

Confidence levels can impact investment decisions, so EPICenter is working to offset that obstacle by providing workshops and skill-building exercises around confidence in pitching to investors.

Colby Midgett assists a customer at her Downtown flower shop. (Renier Otto)

Colby Midgett, owner of Premier Flowers in the city’s South Main District, received support and capital in the form of a low-interest loan from River City Capital, a certified Community Development Financial Institution whose mission is to increase economic development in underserved Memphis neighborhoods.

She ran her flower shop out of her home before opening a brick-and-mortar location in Binghampton with the help of River City Capital. Her business grew so rapidly, Midgett moved Premier Flowers to its current Downtown location, where she now employs a staff of three.

“River City was a great experience,” she said. “They were very supportive, very knowledgeable, and they exposed me to a lot of what small startups need. Often you hear about small businesses starting up and they don’t have the resources they need. River City connected me with a lot of other community organizations that helped me grow, gain knowledge, and expose me to other things and open doors.”

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River City Capital, whose clients run from barber shops to breweries, works to attract and leverage investment capital for community revitalization, providing loans for community development organizations and for-profit businesses operating in three targeted underserved neighborhoods: Greater Binghampton, Frayser and Upper South Memphis.

“There’s no such thing as equal opportunity without equal access to capital,” said Anthony Young, River City Capital’s Economic Development Director. “In the neighborhoods we serve, we often see business owners who’ve been disenfranchised and underserved by traditional banks.”

Lack of liquidity or time in business or formidable credit issues are among the reasons those businesses are underserved by financial institutions. And while River City’s investments are debt-based, they offer significantly low-interest rates to individuals who might be denied for traditional loans or charged exorbitantly high-interest rates.

The exterior of Premier Flowers at 10 North Second Street. (Renier Otto)

“We call it ‘compassionate capital’ because the barriers of entry are very low,” Young said. “if you’re a client of ours, our goal is to get you bankable. We want to provide the initial capital needed to grow, then continuously work with you so that in X number of years you can walk into any bank and get the loan you need.”

River City Capital clients include an array of community-based business, including one of Memphis’ signature entrepreneurial brands – the musician.

The organization partners with Slim House, the Soulsville birth home of blues musician Memphis Slim, which now houses programs designed to build the local musician pipeline. Musicians receive financial literacy training and loans that can be used to purchase equipment, space and other needs.

Between 2013 and 2016, River City lent about $388,000 to clients, which resulted in the creation of 47 jobs. However, only 18 percent of those loans went to women, according to the 2015-2016 annual report.

River City Capital also works with Economic Development Growth Engine for Memphis and Shelby County (EDGE) to offer an Inner City Economic Development (ICED) loan program. The three-year forgivable loan of up to $25,000 is available to Memphis businesses and can be used to make interior, facade and streetscape improvements.

John Lawrence, EDGE’s Senior Economic Development Officer, said ICED loans have so far benefited 43 small businesses through a total of $950,000.

“The ICED loan is for the improvement of their property to help someone do more business and make more money by being more attractive to their customer and being inspiring to their neighbors.”

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Read more articles by Aisling Maki.

Aisling Maki is a writer and editor with awards from The Associated Press, Society of Professional Journalists and Public Relations Society of America. Her work has appeared in publications in more than 20 countries and she has written locally for more than a dozen publications, including The Commercial Appeal, Memphis Flyer and Memphis Parent Magazine. She previously worked as a digital producer and weekend reporter for Action News 5, Memphis correspondent for the Agence France-Presse (AFP) and staff reporter for Memphis Daily News.