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Microbusinesses survive in tough times

While national economic headlines feature job losses and stock market shakeups, NCP neighborhood economics rely heavily on the smallest businesses – microbusinesses employing no more than five people. Surprising numbers of these tiny enterprises are fighting the economic tide to survive and even thrive amidst recession.

Take Vixen Beauty Lounge, a hair and makeup spa that opened on Division Street in Humboldt Park in May 2009, after a year in limbo while getting a license. Once able to open, Vixen’s personal approach and air of Hollywood 1950s glamour drew in 300 new clients in less than a year. In March, owner Vanessa Vargas was looking to hire two additional stylists.

Photo: Eric Young Smith

Owner Vanessa Vargas was looking to hire two additional stylists within a year of opening Vixen.

This success was all the sweeter for the struggle it took to get there. Originally, Vargas and her initial business partner, Melissa Sanchez, began renting the space in 2008. (Sanchez has since moved on to other ventures.) Since it previously had been a salon, they thought obtaining a license would be simple. It wasn’t.

“We were pretty naïve,” Vargas recalled. They expected to put their money into renovating the space; it actually went to attorneys’ fees through the licensing process. “Still having this space, having to pay for everything, and not being able to open -- that was hard.”

A loan from Accion Chicago, which specializes in small and startup business loans, saved the day. “If it wasn’t for Accion, I wouldn’t have been able to do it,” Vargas said. The $12,000 loan paid the balance of attorney fees and covered the renovations: “painting, putting up wallpaper, putting up stations.”

Vargas appreciates Accion’s willingness to look beyond traditional small business loan criteria and lend to brand-new enterprises. “They took a chance with us,” she said. “Without it, we really would have been stuck.”

Once her Accion loan is fully repaid – she’s already more than halfway there – Vargas would like to discuss a new loan to expand to another location. (For a sidebar profile of Vixen and Vargas, please click here.)

Capital = Jobs
Vixen’s story highlights the power of microbusinesses to generate jobs and one of the greatest challenges small business owners face – access to capital. As job creators, these tiny businesses pack an outsized wallop.

Photo: Eric Young Smith

A $12,000 loan from Accion Chicago made the dream of Vixen a reality.

According to the Association for Enterprise Opportunity, a national trade association supporting micro-enterprise, businesses with five or fewer employees account for 17 percent of jobs in Cook County.

That percentage appears to be much higher in NCP neighborhoods. Eduardo Arocho, executive director of the Division Street Business Development Association, estimates 80 to 90 percent of the businesses there employ five or fewer people.

David Beteljewski of the 18th Street Development Corp. estimates up to two-thirds of the businesses lining Pilsen’s main commercial street would meet the microbusiness standard.

When asking NCP business development leaders about the state of microbusiness in their neighborhoods, the words “ “survive” and “tough” came up frequently. In Little Village, Enlace Chicago surveyed small business owners, asking them for their greatest accomplishment of the last five years.

“Everybody said: ‘Survival. We’re still here,’ ” observed Alejandro Guzman, Enlace’s economic development manager. “The really small businesses, five people or less, are the ones that are struggling the most right now. This last year and a half has been really tough.”

“They’re tough. These are very tough people in those businesses,” observed Pilsen’s Beteljewski. “People are just toughing it out as best they can. I know there’s been cut hours and cut days. I think they’re relying on the family unit to persevere through this.

"If your daughter is working the cash register, you don’t pay your daughter – you’re going to give her an apartment upstairs, you’re going to feed her," he adds. "That’s much more prevalent in this neighborhood than in other places. You’ve got stronger family units to absorb hardships.”

Giving Youth a Taste
Even in survival mode, these businesses often give neighborhood youth a first taste of the work world and of entrepreneurship. On the Near West Side, Delashone White, the owner and one-man operator of Gentle Wash Mobile Detail, took on nine youth employees last summer. To pin down his mobile business, he bought a canopy and put the word out to his clients where he and his interns would be.

Photo: Mike Quinlan

Delashone White, the owner and one-man operator of Gentle Wash Mobile Detail, hired nine youth employees last summer.

“I would give them hands-on training as far as detailing, chemicals to use, proper procedures,” White says. “If we had any down time, I would use interns to do community service – picking up trash, cleaning up.” He’d also take one or two with him on calls from clients outside the neighborhood.

And he’s stayed in contact with some of his interns during the past year. “One kid, he’s getting ready to go off to college this year. He was thinking about being a business owner someday himself. He could see what it takes to generate a business,” White said. (For a sidebar profile of Gentle Wash and White, please click here.)

While microbusiness success stories like this are inspiring, they can’t happen unless small-scale entrepreneurs have access to the capital they need to start and grow their ventures. The collapse of the housing market froze traditional bank lending across the board, including small-business loans. And conventional banks have never been kind to startups.

Enter Accion Chicago, which has been lending to small and startup businesses since 1994. Over time, about half of Accion’s loans have been made to businesses in NCP neighborhoods.  “We have very strong referral partners” in NCP neighborhoods, said Mary Fran Riley, vice president for resource development.

Division Street’s Arocho concurs. “We’re always promoting that service,” he said. “We had them come out here in March and we’re hoping to have them come out again.”

In the last two years, Accion has made 989 loans totaling over $700,000 in NCP neighborhoods. “We fill a pretty unique niche,” said executive director Jonathan Brereton. “We’re the only lender making alternative loans at any kind of scale. This is a vital piece of the economy that has often been overlooked.”

Taking Accion for Small Businesses
But right now, small loans to small businesses are hot. Last November, the City of Chicago reallocated $3 million from the leasing of the Chicago Skyway into a loan fund for small business. Accion Chicago received $750,000 to be lent to small businesses within the Chicago city limits. By mid-January, a handful of loans had already been made from this pool of funds.

While banks put loan applicants through a yes-or-no screening process largely dependent on credit score, Accion has to work harder than that. “We have to take the time to find the people who don’t look good on paper, but we think it’s good for them, it’s good for us” to make a loan, said Brereton.

Because its mission is to support small business owners, Accion is more willing to take a risk on a borrower than a traditional bank would be. “It’s not purely about getting re-paid,” Brereton said. Its business model can handle a loan default rate of up to 10 percent over multiple years.

In 2009, its default rate was high –12 percent – but not unexpected given the state of the economy.  In response it began looking more carefully at prospective borrowers’ cash flow, and its loans are doing better now. Brereton projects an 8 percent default rate for 2010, which he considers sustainable.

However, Brereton and Riley acknowledge that Accion alone can’t meet the demand for nontraditional business loans. “The city wants to create more of us,” particularly a similar entity that could make larger loans, said Riley. “There’s a need above $25,000 that’s not being met. Right now that hole is enormous.”

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