[sudo-discuss] Crime and its opposites: starting a microenterprise lending system.

[GtwoG PublicOhOne]

Continued from my posting under the "crime" topic.


How to setup a microenterprise lending systemand start a bank.


1)  Find a local credit union or local bank whose management are willing
to agree to the project.

2)  Set up an account for this purpose.  This can be done by any legal
entity formed for the purpose. 

3)  Solicit funds from whoever.  All the money gets deposited to the
account.  Bookkeeping keeps track of who's in for how much, in case
someone wants to exit the system and withdraw their funds (with simple
savings-account interest).  The minimum to shoot for should be
$120,000.  Better, shoot for $250,000 which is the limit of a single
FDIC-insured deposit account.  The targets can go higher as more
FDIC-insured deposit accounts are opened.

4)  Whenthe targetamount is reached, it gets used to tie down a secured
line of credit with the bank or credit union (or more than one as the
case may be).  The secured line of credit will probably be somewhere in
the neighborhood of 60% to 80% of the funds on deposit, but that's OK
because it serves a specific purpose (per (12) below).

5)  At this point, go into the 'hood and the schools and work with
existing local organizations to seek out young people who have
entrepreneurial smarts and who are seriously at-risk of opting into
crime-world.

6)  The secured line of credit is used for lending to the grassroots
microenterprise startups. 

7)  Work with groups of kids to develop viable business ideas.  Do the
whole business planning exercise with them, teach them how to do it. 
Ideal case is that the first round of these won't depend on renting
storefronts: rent is a huge expense and a business-killer unless gross
sales can rampup quickly.  Best if the group members can continue to
live with their parents (to keep costs down), though this can't be taken
for granted, and shared housing arrangements may be needed.

8)  Each group that qualifies gets signed for a startup loan.  The loan
is actually taken with the bank or credit union.  However, the loan is
secured by the funds in the account under (3) above.  This means zero
risk to the local financial institution, and that's the key to getting
their approval for the whole project. 

9)  The agreement between the organization and the groups it funds, is
that 20% of their net profits, goes back to the organization to grow its
pile of capital.  This is in addition to repaying the loan to the local
financial institution.  (VCs are typically looking for 30%, so this is a
better deal for the new startups.)  In addition, the founders of these
startups are obligated to help withoutreach and mentoring of others,
after they themselves succeed.

10)  If a new startup can't make a loan payment, the money is paid
fromthe secured account.  The risk is distributed proportionally across
all of the contributors to the account. 

11)  Stay actively involved with each new startupthrough its first five
years in business.  If it survives its first year, it is most likely to
survive the next four years.  After five years,it is likely to continue
successfully.

12)  Per the agreement with the original financial institution(s), once
a startup successfully pays off its starting loan, it becomes eligible
for comparable credit directly from the institution.  This is the step
that leverages the startup fund to obtain independent credit for the
startups after their first couple of years.

13)  At this level the system runs steady-state: its ability to fund new
startups is limited by its own funds.  But that will change under (16)
below.

14)  Once the startups start succeeding, their contributions of 20% of
net will grow the funds and enable more startups.

15)  Once there's an asset pool of a couple million dollars, distributed
across a number of FDIC-insured accounts, possibly at a number of
institutions, then it's time to consolidate all of that money into one
entity, and start a new financial institution. 

This is the point at which the community organization starts a bank.

16)  The new institution starts with a decent chunk of capital,
chartered for smallbusiness and startup lending.  And then it becomes
eligible to engage in "fractional reserve" lending, which multiplies the
effective use of its money. 

If the reserve ratiois 10% assets to loans, that means $2 million in
cash can theoretically produce $20 million in lending.  Note, 10% is
"conservative."  In the US, the actual number is abit below 5%, which
means $2 million in deposits can generate $40 million in lending
capability, assuming that each borrower uses the new institution to hold
its own deposits (this can be written into contracts with new
startups).  Reality is usually substantially below these theoretical
maximums, but any multiplier is a good multiplier.

17)  Fractional reserve lending is how banks "print money."  It's an
enormous engine for economic development.  But instead of enriching a
small number of investors, plowing it all back into the community
enriches the community. 

18)  Last but not least, this could be a candidate for a Kickstarter,
starting at step (1) above.  However, 100% of funds raised should go
direct to the initial account and to the lending program: this is not
the place to generate jobs for the organizers themselves(that may take
five to ten years or longer).

And, to get back to the original "crime" topic, when at-risk kids start
to see real opportunity in starting legitimate businessesor getting
legitimate jobs working for their buddies, they aren't going to opt into
crime-world.  But the point of the exercise isn't just to lower the
crime rate.  The point of the exercise is to enrich the community so
people can flourish rather thanbarely survive. 

-G.










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