Developing Small Businesses and Leveraging Resources in Detroit
Seven session series - Chicago Federal Reserve Bank
Notes taken by Stephen Boyle
October 16, 2012 - afternoon
[ link to Ocober 17, 2012 morning ]
Contents
Lyke Thompson - WSU Urban Studies
Strong Entrepreneurial Supports
Wendy Lewis Jackson - Kresge Foundation
Reception with Congressman Gary Peters
Dennis Koons, Michigan Bankers Association
Emphasis that the Fed is interested in well being of Detroit. The schools need to be fixed, they are financially broken.
Maude Toussaint-Comeau
The report is not a final document - it should serve as a foundation for next steps.
Expand the economic vision toward small business development.
Access to capital faster is key to startup success.
Identify the gaps in credit and lending practices
Trends are showing shrinking markets for small business. Those outside Detroit have seen growth in business startups - significant increase. Growth suggests the resources for economic diversity.
page 24
41 businesses per 1,000 people - shown
24 businesses per 1,000 people - shown in blue
Growth opportunities showing as new businesses show up - requires creativity to bring these endangered new businesses into the mainstream. Traditional credit standing can stand in the way.
page 55
Q&A Sessions with some brief presentations
Moderator: Paul Traub grew up in Allen Park
Panelists:
Population: 685,293 as of 2011
Crime, quality of city services, quality of employment
Midtown has dropped crime 38% in 3 years
Decline investments in problem areas and increase in growing areas.
Many young people in Detroit
Transportation is largest industry
Major employers downtown - more than half are non-profit. Services established as non-profits.
Medical care is increasing as baby boomers age.
How do you support entrepreneuership?
Directly selecting and educating. Prefer immigrant business owners. 150% more likely to have college degree. 600% more likely for foreign immigrants to start business.
Key locations are along the river, up Northend, and far west side of city are receiving most attention by foundations and initiatives by city and state.
Train people - example Tech Town
Declines in population noticeable, more worrisome is decline in employment.
Early next year working on business to business connections for more industrial service sector business.
Manufacturing businesses has large opportunity - this includes transportation and more.
Hoping for a public bridge
Environment and industrial engineering, demolition, deconstruction
Non-Industrial - learning centers, hospitals, creative businesses (hot along Woodward spine - Taubman Center, WSU, Transportation mobility)
Shinola - watch manufacturing business startup
Prosthetic limb manufacturer at WSU
“Businesses have their own neighborhoods” - potential for branding and naming business neighborhoods. Will help on targeting investment. Seven employment development centers, not necessarily where commonly thought.
$3.2 billion dollar foundation started in 1960s with $60 million death benefit from Kmart founder
Greener and more equitable future
$25-30 million across Detroit each year in nine areas. Grants as small as $5,000 as large as $1.5 million for M-1 Light Rail.
Last five years working on new paradigm for entrepreneurship with partners like Lyke and Olga.
As a one industry city - the change is critical and urgent to diversify
Philanthropy as the risk capital for building a new economy
2008 New Economy initiative
Largest pool bringing 10 foundations together
Perspectives on Conditions for Small Businesses
Moderator: William Testa
Chinwe: Continuum of financing options - not just banks
Lydia: Can’t just do it conventional to get business into collaboration and acceleration
Greg: Attract businesses in areas that we aren’t familiar with - become more educated pool of investors
Lydia: Bank should be able to find partnerships through them as an intermediary. This is new mode of thinking - relationship building is essential
Lydia: Need to have people in the panel that didn’t get funded and why? That is what is missing in the room and needs to be in focus.
Chinwe: Long view approach so a win-win is possible without so much focus on the short term. Get to know your risk/reward equation and shop it out into the different ways of finding financial support. Some are less risk averse than others.
Lydia: Respected entrepreneurial programs could open doors into financial backing.
William: Are the lending institutions making it easy to prepare to enter lending channels
Lydia: Credit cards are more welcome than lending channels
Brian: Focus is headed into financing and assisting business get going rather than the business that they are creating. The loan / financing is a step into business.
William: Why Detroit as my location and how to work that to my favor when speaking with banks?
Brian: Access to space and resources - low cost to entry. This is a very large small town. More engineers in SE Michigan than most areas of country. Downfall is that we are very transactional - more chance meetings and fewer continued interactions.
Chinwe: Bay area / Chicago / Detroit. Bay has a lot of tech focus. Many companies have gone out, created, reached an end of success/failure, then come back again and do it over. Chicago has those that get to the end and only return as investors and support channel, not so much hands on in the subsequent runs.
Greg: Dan Gilbert is doing some of the come back around Chinwe mentions. Agrees with Brian as to available land and resources. Not much support for high tech companies, not seeing the successes that other areas of the country see in them.
William: Alumni association of angel investors would be helpful if identified.
Lydia: HATCH Detroit had over 300 applicants and only one winner selected. There were 299 budding businesses that showed up. Support doesn’t always look like a lot of cash. Sweat equity is how many are getting going. Need the banking institutions to think outside the box to help here.
William: We don’t know what the next generation of businesses is, or is that true?
Lydia: Technology, bridge bringing investment in, food will grow. Feels Detroiters are the best workers anywhere. They work hard and are dedicated. Walking & riding bikes to work.
Brian: Don’t get to predict, but you have to support the ideas coming in. Filling the incubator created is a misdirected action.
Chinwe: Bring people together, give them a chance to meet each other. How can you bring skill sets and minds together? Banks can create programs that make the environment happen by offering connections, and tools to understand their market and allies better.
If the credit score doesn’t work for the bank manager then you simply are out of luck
Need banks to get to know their customers
Regulators are plotting against small business success - create competent crowd funding campaign. Proximity, Kickstarter, once these work then you walk into the bank as a desirable customer.
Dennis Koons - Banks are not the only source of start up capital. A bank CEO told a group in Grand Rapids that if they are paid only 95% then they will fail.
Chinwe - working with a de novo bank in Chicago.
Connecting Small Business Owners with Resources: On Overview of Local Practices
Moderator: Cathy McClelland
Panelists:
Richard: “Fast track to the future” (TechTown) provided funding into training on how to be an entrepreneur. Would like to get those people that went through the program to share what they learned. Technology businesses tend to be clustered around university and business centers. Neighborhoods aren’t producing technology businesses. Has a counsellor for technology entrepreneurs.
Daryl: Certain types of startups work in certain environments. Establish what outcome are you headed toward in working with the community. Different strategies needed for different outcomes. Determine which strategies work in the business and which are outside scope. Granted through NEI to assist minority entrepreneurs through business counselling services. The activity of business isn’t the issue, it is the scaling of the business.
Gerald: Offers counselling on business development and entrepreneurial development and training. Extensions of SBA deliver focus into interest groups. Work very closely with lenders / financial community. SBA guarantee loans bigger than any district in the nation. 2,300 loans valuing just under $80 million. When good deals don’t get done it is due to exposure. A number of contracts from Federal government are set aside for small business specifically. If businesses were more diversified they stand a better chance of success. Reeducating business as to how SBA is working with them. Lenders are interested in the 5 C’s of lending., entrepreneurs need to know what they are walking into. When lenders see you’ve been prepared by SBA they should be more willing to work with you - you’ve been groomed to be more of interest and you’ll be sent to lenders that are listening for the business you are working on. Figure out how to become “bankable”.
Dana: Providing pro-bono legal assistance through the clinic. Clinics are tending toward 1-5 people in a business, technology interested/motivated. Centers at university are being created but without legal advice to avoid issues. Knowing how to form as a company, look at the relationships of the founders and employees or contractors as they are brought in. Small Business Clinic at Wayne State University also.
Richard: SBTDC at Eastern Michigan University - complete program works much better than pulling portions of the learning. Take the time to get to know the breadth and how it all works together. Over half the businesses in the world get started with friends and family money. Many get started for under $50,000. Check the Pure Michigan site for Pure Michigan Business Connect.
Daryl: Difference between business development and entrepreneurship. It does revolve around procurement stage. Difficulty in the marketing space for manufacturers. People don’t seek support until they identify that they need support. Doing the due diligence on what is available to support me works for those that are successful.
Gerald: The network is statewide and setup to serve each county in the manner it needs. There is small business and there is small business - little urban and rural shops. How do you reach the street corner businesses? Many of these small businesses don’t join a chamber of commerce but might be in a community development group. Need first line need into the pipeline so it can be addressed as early as possible.
Fourth Panel Discussion
The Small Business Lending Environment: Financial Institution Community
Moderator: Michael Berry, FRB Chicago
Panelists:
John: Troy MI based bank, granular diversified portfolio. Commercial lender over 30 years - now is unique. Banks are chasing specific deals that have strong balance sheets - this is where the attention is focused.
Jeff: Only bank left that is headquartered in Detroit. If 5% of loans go bad they have problems, so they are very selective. Being bankable is required to do business with them.
Keith: 93% of businesses are not seeking bank financing. Those being approved are older, larger and established. Need to begin the dialog with banker before you absolutely need financing. tehy need to know how your business is operating and at what point you’ll be walking in seeking funding. http://RegReformTracker.ABA.com - Dodd-Frank Tracker, www.BanksAndTheEconomy.com
Joseph: Examiner at the FRB. Credit market shrank. Michigan leads nation for the recession. Led nation in unemployment for several years. Michigan was in top 5 banks seeing 60%+ declines in development activities. Heavily auto industry related counties hit hardest. Bank has to shrink assets to increase liquidity. More banks should make credit more available. Only one community bank headquartered in Detroit (Jeff’s bank). Have not seen de novo banks spring up so we are still waiting for those to signal corrective economic climate. Lack of growth opportunities in Detroit, bankers are looking for job growth. Post recession - less reliance on character lending, more skin needed on behalf of borrowers. Next steps - last 12-18 months have been improving, but the loan demand has to pick up. Interest rate environment is hard for banks to remain profitable.
Howard: research analytical chemist, went to law school and got into banking law. Dr Doom is in the house. Detroit attorneys are the lowest rate in the country - stay local for legal counseling.
Skin In The Game - Qualified Mortgage Rule to implement section 941 of Dodd Frank Act
Proposed rules on how to set interest and value in securities. Only applies to securitized loans (pooled into bonds). Underwriting standards will become the “gold standard” for lending.
New unestablished businesses will have a tougher time getting financing.
Prejudice is prevalent. People coming into lending practice but they aren’t getting the education needed to make Fair Lending actually happen. Virtually no financial education happening in public schools. Learning how to evaluate credit, assets, skills, relationships is missing for loan officers. Being well-intentioned doesn’t work. Question of legitimate business purpose and is this being pursued without disparate rules.
Frank-Dodd amended section 704B of ECOA to require data reporting on small business loans (similar to HMDA reporting for residential loans). Differing considerations don’t make bringing the information together well.
Banks may need to choose residential lending or commercial lending and be specific. Chasing the people that know the new rules has created a hunt for people moving from bank to bank.
Rules have deadline dates that are making it tough for everything to be implemented.
Q&A
Michael: What resources are of interest to lenders as collateral?
Jeff: Need to fully understand the value of assets with other banks.
John: What is happening as maturity dates are being met on securities and what value will they have when completed? Climate of lending is changing as time progresses, what looks good now may change.
Keith: BFF needs to avoid meaning Bank Failure Friday. People and banks don’t want to get called out in reporting by examiners. Examiners will watch in a specific way but miss how value is added.
Howard: FDIC failures are when you don’t find assistance for banks that are stressed. Need to note the compensation for banking officials, what measures are used to determine?
Joseph: Inspector General checking on the regulators are focused on finding the problems and ignore the positive during reporting.