Michelle Gets a Loan: How a Credit Union Helps Where Banks Just Won’t

March 20, 2014 — 6 Comments

(Or, Why I Put My Money In Self-Help Credit Union, Part II)

 1.

When Michelle Holland started her little bus company in 2009, she would rouse her son at four each morning. He was ten and his single mom had no option but to grab his pillow and plop him in a rear seat of her refurbished yellow school bus while running routes through Charlotte’s neighborhoods. He would grab his last winks of sleep while she collected students from their homes for delivery to a local charter school. For the privilege of avoiding the hassles of car pools, the parents would pay Michelle a small fee each month. She would drop them off before extending her trip a few extra miles to get her own son to his school.

Such was start-up life for Michelle and her Eagle Bus Service. It was tough, but it supplemented the income from her bookkeeping practice. And after several years spent juggling the demands of an all-consuming corporate life with the demands of being a young, single mother, it let her be near her son more often.

Now word was spreading to other charter schools that Michelle could solve their transportation woes. The state gave them funding to educate kids in their own unique ways, but it didn’t give access to the county-run fleets of buses. Principals saw what Michelle was doing for her first client, and they wanted her to expand; to help them, too. They were offering guaranteed payments and year-long contracts if only Michelle could scale-up her service. If only she could get more buses and more drivers.

Michelle's Bus Fleet (Credit: Michelle Holland)

Michelle’s Bus Fleet (Credit: Michelle Holland)

This is the story I’m getting first hand from Michelle in a phone conversation one afternoon last fall. We had been trying to connect for weeks, but Michelle isn’t exactly swimming in spare time. Her morning schedule remains largely the same as it was in 2009 – up well before dawn, preparing to get students safely to school – and her days are spent balancing the desk work of Eagle Bus with the needs of her few remaining bookkeeping clients. In the meantime she was searching desperately for another bus to add to her growing fleet. She usually bought them in North Carolina, but someone was grabbing all the state surplus vehicles before she could get to them. Michelle had just driven to rural Virginia to find one that met her standards. We were speaking because I was interested in how she got the money for that purchase.

A thinker named Woody Tausch has described entrepreneurs as the “poets of the economy. They are holders of ambiguity and risk. They cultivate interstitial spaces where demand and need and aspiration coexist in a mildly turbulent state of chaotic possibility.” Something about their wiring makes them different from you and me.

Well, from me at least. I would be exhausted and overwhelmed to a point of emotional paralysis were I being pulled in all the directions of a Michelle Holland; facing down all the uncertainties that come with building a sustainable business. But Michelle is wired appropriately for this work, and she speaks assuredly in a refined southern accent. She’s calm, confident and somehow conveys a sense of optimistic energy. She believes she’s doing something important for her community by building this business, and she tells me this buoys her. She’s been able to manage through all the ambiguity and risk because of this sense of purpose to her work.

But at no time has that natural optimism been tested more than when she walked into the local branches of Charlotte’s big name banks – with documents demonstrating commitment from new charter school clients ready to pay for her services – asking for loans to buy more buses. Three times she asked. Three times she was greeted by enthusiastic loan officers confident in her chances. And three times she received rejection letters from the banks’ centralized underwriting bureaus. We regret to inform you…, they each began.

Here Michelle had a viable business with several years of track record as evidence. She had commitments from new customers to demonstrate that if she invested in growth, they would provide the cash to pay for it. And she would have collateral in the form of the buses to protect the interests of anyone lending her money. Still, the big banks wanted nothing to do with her.

I’m curious about this because it seems to make such little sense. If there is a profile of a qualified borrower, the Eagle Bus Service would fit. But the banks’ response was not unique to Michelle. Last year the New York Federal Reserve Bank surveyed small business owners asking about their biggest challenges. The biggest, by far, was access to capital. When they needed help to grow, even companies with enough cash flow to make payments on traditional business loans were being rejected by banks.

Why?

First, opportunity cost. Lending to small companies is a terrible business in terms of other places banks could put their capital. Let’s say Michelle is asking for $50,000 to buy new buses. By charging five percent annual interest on that loan, a bank stands to generate some $2,500 a year in revenue from Michelle. That might not sound too bad until you consider that all the costs for selling, underwriting and servicing loans are pretty much the same whether you’re lending $50,000 or $5 million. That being so, the banks have a lot more incentive to loan $5 million and earn $250,000 for their efforts than they do working so much harder to sell 100 Michelle-sized loans to make the same revenue. There’s just more profit to be made in the big loans, so it should be no surprise that banks prefer them.

Second, risk. Michelle-sized loans to Michelle-sized businesses are risky and yet don’t offer banks enough reward to offset that risk. Despite the apparent lack of risk in Michelle’s application (her long track record, her new contracts with charter schools eager to help pay the bills, and the collateral the buses represent) the fact is that many more businesses like hers go under than survive. That’s just the actuarial reality of small enterprises. They are risky. The vast, vast majority goes belly up, and this makes banks wary of them.

Third, investor expectations. Combine the opportunity cost and risk and multiply it by the most powerful force banks contend with: the requirement that they maximize profits for shareholders. Their corporate boards are told they have a legal fiduciary duty to owners of stock, and that they must make as much profit as they can to fulfill that responsibility. If they don’t maximize profits they get pressure from hedge funds or lawsuits or both, and so bank boards have powerful motivation to chase profits. They instruct their executives to earn more money each quarter if they want to keep their jobs, and these instructions flow downhill to loan officers and underwriters.

None of those reasons are meant to cast moral aspersions on banks. They don’t operate this way because they’re inherently evil or because their leaders are bad people. Far from it. With some notable (but rare) exceptions, banking people are fine, well-intentioned citizens. But their system is built on profit incentives, and small business loans are simply not rich profit centers.

With that in mind, it’s not surprising that the banks chose not to loan money to help Michelle grow.

Pausing the story here, let’s ask a critical question: Does it matter? Michelle’s business hardly registers a blip on the economy of her town. It’s an infinitesimal speck in the broader economic universe. So why should we care whether anyone loans money for Michelle to grow? Or, going bigger picture, why care about small businesses at all?

 

2.

Each month the Raleigh Chamber of Commerce sends me an email heralding my city’s recent economic development progress. We’re constantly trying to grow our economy by luring businesses here, selling them on the virtues of our fair town and putting together packages of tax incentives to make sure companies choose us and not, say, Nashville or Birmingham or any other number of our new South competitors.

Why do we do this? We like expanding our tax coffers, to be sure. We like big companies telling us they like our town. It’s reaffirming of our zeal for the region. And we like making progress in measurable leaps; in ways that move the needle tracking job numbers and economic growth. We have plenty of big employers here already. To break the top 20 you need to bring us a couple thousand jobs. To garner serious headlines, you need to tell us you’re bringing – at least – a couple hundred new jobs.

This makes sense. The stories excite me, too. We’ve been celebrating MetLife recently, the insurance giant known for the Snoopy dirigibles the lumber above major sporting events. The company has committed to bringing about 1,300 jobs to Wake County. The economic impact is real: the new jobs will pay well. The company will no doubt need more office space as well as a slew of supporting accounting and legal and other such services that will ripple through our economy. Bringing MetLife here is a big win for our Chamber of Commerce and worthy of the press it’s earned. It moves the needle.

MetLife (Source: Author)

MetLife (Source: Author)

MetLife also creates a massive mental anchor against which we contrast the impact of tiny enterprises like the Eagle Bus Service. While MetLife, with all those jobs, will surely inject tens of millions of dollars into our economy in just a few years, what kind of impact could we expect from a Michelle-sized company? Hers is a lifestyle business. Her direct impact is measured in buying a few used buses, hiring some part-time drivers and (hopefully) earning a higher income for herself. It’s a speck. Again I ask, why should we care about these tiny businesses?

Individually, their impact on an economy is imperceptible. But collectively, it’s a much different story. MetLife might bring 1,300 jobs to Raleigh, but in any given year Raleigh has thousands of entrepreneurs like Michelle trying to grow their businesses one, two, three people at a time. That impact far exceeds any single job provider. The Kauffman Foundation’s research tells us these small businesses account for at least half of the country’s overall economic growth.

More importantly, the small businesses are composed of people whose commitment to a place extends beyond economic benefit. While MetLife’s choice of Raleigh was most certainly couched in cost-benefit calculations – weighing each new city against its potential for yielding the highest profits – entrepreneurs like Michelle are rooted in their communities. They are committed to the community and plan to stick around a while, reinvest locally and spend their profits close to home.

Ari Weinzweig is one of my business heroes. He and a partner started Zingerman’s 30 years ago in Ann Arbor, growing it from a single deli on Michigan Avenue to a bustling community of businesses employing some 600 people with revenues pushing $50 million. They’ve done all of this while keeping their businesses rooted firmly in Ann Arbor, hiring from the community, selling to the community, being inextricable from the community.

In a 2010 essay, Ari reflects on economic development and its focus on bringing outside business into the community. He wrote about one of these businesses that, like MetLife to Raleigh, came with much fanfare, bringing some 2,000 jobs, but ultimately left for greener pastures:

“This was a company wooed here with tax breaks and a whole lot of city support. In many ways this seems akin to organizations – in business, sports or whatever – where huge amounts of money are spent to bring big names in from outside while those who’ve been contributing all along (and who would likely have stayed rooted for the long haul) are basically ignored…What would happen if these incentives had been dedicated to local businesses, or to organizations that had a commitment to commerce and community that extended beyond immediate economic opportunities?”

Why do small businesses like Michelle’s count?

They count because in aggregate their economic impact is at least as big as big business. They count because they are more than data points in an economy, they are friends and neighbors; members of our community, not just employers bearing jobs. They count because they help get our kids to and from school, or provides other products and services that we want and need.

And they count because they stick around. While the big businesses we work so hard to lure to our fair cities have a nasty habit of leaving when some other city comes calling with a better package of incentives, the local enterprises are rooted and tend to be committed to a community in ways that can’t be measured by profit alone.

The brutal reality of large corporations, with their requirements to show ever-growing shareholder returns, is that they have a tendency to go away. And when they do, they leave gaping holes that – the more dependent we become on their jobs – are not easy to fill.

 

3.

In July, 1980, New Bern’s Texfi plant abruptly halted production and laid-off its 500 employees. There was no advance warning. Among the newly unemployed were Percy White and his wife Elnora.

New Bern sits on a piece of land that juts into water near the Atlantic Ocean where the Neuse and Trent Rivers converge. It’s about 100 miles east of Raleigh. Texfi, a manufacturer of polyester fibers so popular in 1970’s fashion, was among the town’s largest employers.

Losing 500 jobs affects big towns as any local economy will be hard-pressed to source new opportunities for a surge of job seekers. For New Bern – a town with about 30,000 residents – it was devastating. It was already reeling from high unemployment, and now this.

New Bern Bakery (Credit: Self-Help Credit Union 2009 Annual Report)

New Bern Bakery (Credit: Self-Help Credit Union 2009 Annual Report)

A healthy entrepreneurial ecosystem is important to the stability of any community. It’s not to say the Texfis and MetLifes are no good. They are. It’s just that these big, headline grabbing employers can lead a region into risky concentration – like putting all your eggs in one basket or counting on a single stock in your portfolio to see you through retirement. There’s always the chance you drop the basket; that the one stock turns south; that the Texfis and MetLifes decide cheaper labor markets will reduce their expenses and prime their profits and so leave. What happens then?

That was the dilemma my state faced a generation ago. “In the early 1980’s, North Carolina’s economy looked like the Rust Belt,” Martin Eakes of Self-Help Credit Union told an interviewer recently. “Whole communities were left unemployed.”

For decades towns in the Carolinas had built themselves around concentrated industries like textiles or furniture or even single mills like Texfi in New Bern. The companies came to the state because labor was cheap and unions were weak, allowing factories to churn out more goods at lower costs. This worked out pretty well for a long time. Business was booming, profits high, and the companies couldn’t hire enough people. It was pure symbioses with everyone benefiting. The towns were growing, employment was high, tax coffers were full.

But soon enough the same force that drew the companies to town started pulling them elsewhere. Over time North Carolina was no longer a source of labor cheap enough for the businesses to make profits high enough to keep shareholders happy enough. Competitors were faring much better by producing overseas and importing finished goods back to the U.S. to sell. The labor was so much cheaper in Mexico, South America and eventually Asian countries that the economics of the North Carolina factories no longer made sense. So businesses like Texfi started packing up and taking all those jobs with them.

Communities like New Bern were left with gaping holes in their economies. All these people like Percy and Elnora White were not only jobless, but their skill sets were particular to an industry that was no longer offering employment. And because the local economy had designed itself around one big factory for a generation or more, there was nothing else to fall back on. The high cost of concentration – of depending on the big employers – had come due.

It was the same scene repeated all over North Carolina that led Eakes to call it the Rust Belt, and this was the state to which he returned after spending a few years earning law and public administration degrees in the Northeast. A native of Marytown (outside of Greensboro), various tellings of Eakes’ story have his interest in local activism taking root during his undergraduate years at Davidson College. He and a tight knit group of friends would hold late night bull sessions debating the political and social issues of the time, and in these discussions Eakes began extolling the virtues of a concept they would later call economic justice. After grad school he had visions of going into blighted towns like New Bern and rallying unemployed mill workers with legal and financial advice on how to gain access to the economic system; how to start their own businesses; how to become self-sufficient rather than praying for another big mill to come and resurrect their community.

These were the precise circumstances in which he met the Whites. The couple had briefly entertained acquiring the Texfi mill with their laid-off compatriots, making a go of running the business as some sort of employee-owned cooperative.  That wasn’t to be, and nor were there any other options for laborers with their experience. But Percy knew how to bake, and Elnora knew her way around a kitchen. A handful of other unemployed friends offered to chip in to create their own tiny business – the New Bern Bakery.

At that time Eakes was providing assistance in the form of advice through an organization then called the Center for Community Self-Help. But what he found in helping the Whites was that they need money much more than suggestions. They needed capital to buy equipment, to hire employees, and to advertise their baked goods. Much like Michelle’s experience a generation later, the Whites found their local banks less than eager to loan them money.

The healthiest economies have thriving entrepreneurial ecosystems nested within them. This means they have “poets of the economy” willing and able to foot the risks inherent to launching bakeries or expanding bus services, but they also have institutions able to provide capital the entrepreneurs need to build functioning businesses. When a town depends too much and too long on a concentrated employer, the number of entrepreneurs withers away, and with them goes the systems of supporting capital. It’s hard to jumpstart the money in times of crisis. We’ve already explored why banks are slow to jump in with help. The healthiest economies need institutions without a profit motive, willing to provide grants, seed money, or loans to help get the entrepreneurs going.

This is, I suspect, the most fundamental insight Eakes had as he surveyed the condition of New Bern and similar towns in the early-80s. And so he pivoted from advice-giving to capital-lending by establishing the Self-Help Credit Union. Using Percy and Elnora White as a rallying story, he raffled off a New Bern Bakery chocolate cake in a now mythical-seeming bake sale. It raised $77, funding a tiny slice of the $1,700 Self-Help would ultimately lend the Whites to buy a bigger oven, to bake more cakes, to generate more revenue, to earn entrepreneurial self-sufficiency for a couple that was recently without jobs.

With that loan in 1980, Self-Help was born.  And while a single bakery means little, the little community credit union has leaned into its mission of helping people help themselves. Eakes and his team have opened access to capital to groups of people – like the Whites – otherwise excluded from the system. In 34 years, Self-Help has grown to over $2 billion in assets from which is has dedicated hundreds of millions towards small business loans that have helped communities like New Bern move further from rustbelt-like despair and much nearer to economic self-sufficiency.

One loan at a time; one business at a time.

 

4.

One of those loans went to Michelle Holland late last summer. After the Charlotte banks all turned her down – and just as she was prepared to tell the charter school she couldn’t help get its students to school – she was connected with Jennifer Sherwin, a senior loan officer for Self-Help in Durham.

Michelle checks a lot of boxes for the kinds of loans Self-Help likes to make. She’s black, a single mom, and (obviously) a woman; all three characteristics of people who tend to get less access to lending resources. The Eagle Bus services charter schools, too, a sort of pet project market for the credit union.

But lest anyone imagine Self-Help is anything other than thorough with its underwriting procedures, the application process took Michelle more than six months to complete. Self-Help is not a charity organization. It does not lend money unless it has every reason to believe the borrower can and will pay it back. As part of its economic justice mission, it wants to demonstrate to the banking world that loaning to these underserved markets – the working poor – is not so risky. It aims for 100 percent repayment, and it gets remarkably close.

“Jennifer is thorough,” Michelle told me on the phone. “And tough! She made me look at every detail of my business. I tend to think more from the heart, and I was running the company that way. She told me I had to act more like a business, telling me to go get firm contracts from the new school. If I really wanted the loan, if I really wanted to grow, I couldn’t depend on their commitment unless I had a signed contract.”

Michelle had a stained credit score stemming, she told me, from a lapse in judgment a couple years back when she co-signed for a friend’s car loan. The friend turned out to be less than dependable when it came to making payments.  But where the banks saw a credit risk and rejected her with no questions asked, Jennifer dug in. Seeing an otherwise stellar credit past, she had Michelle provide documents that proved this was an isolated problem.

Think of it: if this loan had been for $50,000, at market rates Self-Help stood to make, maybe, $2,500 a year in interest income. If you’re a commercial bank, you have no choice but to look at it in such stark, binary terms. You say no to applicants like Michelle, and you say no quickly. It’s a matter of opportunity cost, and you have profit targets to hit. You need to spend your time working on the $5 million loan.

Yet for so little upside, Jennifer worked diligently with Michelle, pouring over her books, reviewing her contracts, providing hours of free business advice. At the end, when the loan was up for final discussion with Self-Help’s underwriting committee, Jennifer described it as borderline for meeting the credit union’s strict standards. It was teetering on the fence when Jennifer vouched personally for Michelle’s character, her likelihood to pay back what she borrows.

Michelle got her loan. She used it to buy those buses in Virginia.

“I’m going to do everything I can to make Jennifer look good in this,” Michelle told me. “I’m going to make sure to pay back this whole loan earlier than it’s due.”

 

5.

On a chilly mid-November evening I’m sitting in the auditorium of the Maureen Joy Charter School in a rough, worn-down neighborhood in east Durham. A bevy of middle-schoolers are on stage serenading me and some 100 or so others in the audience with off-key renditions of the best-known Christmas carols. They are students of an 17-year-old school celebrating its brand new building, the doors of which opened a few months earlier to provide at-risk youth a rigorous education and to be a beacon of renewal in an otherwise blighted section of town.

The children are belting out the lyrics, and the further they stray from proper key, the louder the crowd applauds.

I’m here for the Self-Help annual meeting. My wife and I moved a chunk of our savings to the credit union last fall, and as depositors in a co-operative business we’re sort of like shareholders in a corporation. We get invitations to events like this to hear how the organization is faring. But unlike shareholder meetings I’ve attended for profit-oriented banks, Self-Help’s updates are more about achieving the mission than how investor equity is growing. As I knew going in, our deposit has no hope of growing more than the current interest rate allows, but that’s not why we put our money there.

After the singing ends, various executives parade across the stage. They share numbers that demonstrate Self-Help is financially sound, that it’s viable and self-sustaining. But their bit is short-lived, just enough to check a box that the serious side of the business was addressed tonight. The evening quickly turns back to celebrating the mission. The message comes through over and over again. Our finances are strong. We have enough.  And since we don’t have to show ever-growing profit, here are all the ways we’ve been able to live our mission in the community.

The audience is full of depositors like me, but also very different from me. We represent every walk of life, from those whose tweed jackets suggest academia to the wage-earners still dressed in their blue workday uniforms. It’s nearer the feel of a neighborhood celebration – a block party – than a business meeting. There’s a spread of food catered by a restaurant that received Self-Help help. We’re ringed by tables of merchants peddling their wares, all local and all somehow tied to the credit union.

As I’m taking this all in, I’m reflecting on my conversation with Michelle Holland and mulling this Enough Project commitment. I had recently stumbled across a reprinting of an Abraham Maslow book from the late-60’s. In it I discovered the origin of the term “synergy,” that hackneyed phrase once a mainstay of corporate jargon. Sociologist Ruth Benedict coined it in the 1940’s, though Maslow popularized it with his own studies of the Blackfoot Indians.

Abe Maslow (Credit: Wikipedia)

Abe Maslow (Credit: Wikipedia)

A synergistic system is one in which incentives are aligned, where a person is rewarded in some way for doing something that benefits the system. When the individual pursues his own selfish interest, it’s good for the larger group.

With the Blackfoot Indians, Maslow describes a chief who works hard all year to earn money for the purpose of turning around and giving everything away to his fellow tribe mates. It seems altruistic, but Maslow notes that the chief gets status in the tribe for this. He gets respect. It’s part of the reason he has become a chief, and others in the tribe emulate him, wanting status, too.

One earns status by being generous, so people work to earn more in order to give away more and earn more status. The individual benefits and so does the tribe in a virtuous, reinforcing cycle.

It strikes me that this synergy concept applies to the system at work here with Self-Help, too. Simply put, Michelle serves her own self interest by building a business that lets her spend time with her son and earn a reasonable living. At the same time she’s providing a valuable service to the charter schools in Charlotte that need help busing their students to school.

By helping entrepreneurs like Michelle – the many thousand that exist in our communities – with the means to build viable businesses, we’re getting services we need in our everyday lives (farmers, retailers, restaurateurs, piano teachers, AC repairmen, bus drivers) and creating more sustainable economies.  That’s synergy, too. An ecosystem with lots of small-scale entrepreneurs who have local roots creates more stable communities than those that depend on a handful of big employers.

The final point is this: I find synergy by putting some of my family’s money in Self-Help. It becomes my mechanism for helping Michelle in Charlotte and hundreds of entrepreneurs in my area, too. They’re providing services we benefit from, and many of them are doing it in interesting and innovative ways.  As Martin Eakes learned early (and as New York’s Federal Reserve research confirms) they need capital to do it. That capital is not coming from profit-motivated banks, so we need to encourage institutions like Self-Help to step in and fill the gap.

I want to engage in a community with a diverse economy that provides plenty of opportunities for creative, interesting people. You see my most selfish interest is in helping Raleigh continue to grow into the type of place that my own daughters are likely to want to return in some 20 or so years. I want this to be a community in which they are excited by the opportunities available to strike out on their own; to pursue careers; maybe to start families, too.

So, yes, my ultimate self-interest is satisfied by helping to fund institutions that support an economy and a community that’s most likely to keep my kids (and someday grandkids) nearby.

That’s synergy, too.

*****

See Part One here: Why I Put My Money in Self-Help Credit Union, Part One (Or…Never Again, Never Enough).

See an overview of my Enough Project here: The Enough Project and Zingerman’s.

Paul Dryden

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6 responses to Michelle Gets a Loan: How a Credit Union Helps Where Banks Just Won’t

  1. Thanks for such a thoughtful, educational, and colorful piece Paul. I too want to be a poet of the economy!

  2. This is a great inspiratioanl story. I have two credit union accts and I will never go to a large bank. Michelle is a real go-getter and I hope other people take risk like her and go for their dreams. This was a long journey and a fabulous story.

  3. Good job thanks to the Credit Union for supporting our students.

  4. A. Kim Reives McTillmon November 26, 2015 at 8:08 am

    Such an inspiring story. Shelly is such a kindhearted person who has always cared about others. This story solidifies the reason I must continue to revitalize Marytown in memory of Johnny Rogers and in honor of Martin Eakes.

Trackbacks and Pingbacks:

  1. Towards a Hydra Economy | Paul Dryden - June 2, 2014

    […] the impact of moving my family’s emergency savings fund to Self-Help Credit Union in Durham. (See Michelle Gets a Loan: How a Credit Union Helps Where Banks Just Won’t.) In researching Self-Help, I learned what happened throughout North Carolina when we started […]

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