Like many entrepreneurs, Christina Battle had an idea for a business, along with the passion and drive to make it happen. What she didn’t have was money, or even a strong enough credit rating to borrow the money she needed. But thanks to a loan with a 0% interest rate, together with loans from friends and family, she was able to get her dream business off the ground.
“It does sound too good to be true,” Battle says with a laugh, describing her initial reaction when hearing about Kiva Zip’s interest-free loan program for small businesses. “I thought, ‘What’s the catch?’”
Battle’s big idea was a fashion truck, conceived during a brainstorming session over a bottle of wine with her father-in-law, who knew she wanted to start a fashion business but didn’t have the capital to open a retail store. “What about an ice cream truck for fashion?” he proposed. She did her research and learned that there were fashion trucks in the Los Angeles area. With some guidance from an owner of one of them, she put together a business plan, but funding it would be a challenge.
Battle had been bartending for the previous eight years, and operated in a “100% cash world,” she says. She had no consumer debt, but she also hadn’t established business or personal credit either. That meant that using a credit card to fund her business--no matter how risky--wasn’t even an option. The first credit card she applied for came with a tiny limit, “maybe $100,” she says.
Instead, she cobbled together the $15,000 she needed to get started with a loan from her father-in-law, her manager at the bar where she worked, and a $5000 loan through Kiva Zip. She launched TopShelf Style in 2012 and hasn’t looked back.
Small Loans, Big Impact
Kiva Zip offers microloans in amounts of $2500 to $10,000 with repayment terms ranging from 12 to 36 months. “The important thing is that there is no interest and no fees,” says Premal Shah, president and co-founder of Kiva Zip. “It’s like when friends lend to friends. They don’t ask for interest but they want to get paid back.”
It is part of a larger ecosystem of microlenders, who offer loans when traditional lenders can’t or won’t, and often to underserved individuals or communities. “There are some 8000 requests from small business for credit declined every day,” says Tammy Halevy, senior vice president for new initiatives at the Association for Enterprise Opportunity (AEO). Businesses that need credit but aren’t served by banks may have other options, she says. Some microlenders are for-profit organizations, but more than 400 are non-profit like Kiva Zip. Many are designated as Community Development Financial Institutions (CDFIs).
These lenders may be able to make loans to those with credit challenges, or those with no credit (such as immigrants). A number of them offer “credit builder” loans, which can help the borrower establish a positive credit rating. Indeed, Kiva Zip recently began reporting borrower’s payment histories to Experian’s commercial credit division, allowing them to build business credit.
“The other segment that these lenders are terrific with are start ups,” says Halevy. “They are often too high risk for banks. CDFIs often provide a combination of help with affirmation of a business plan as well as the capital to get going.” In addition to a loan, these organizations may provide additional assistance such as business plan development, training and coaching.
A Different Kind of Credit Score
Kiva Zip does not check the owner’s personal or business credit scores. Borrowers are vetted to help prevent fraud, and must meet basic requirements (they cannot be in foreclosure or bankruptcy, for example). Loans must been seen as having a positive social impact, and the owners must have a business plan. Borrowers are also required to invite friends and contacts for initial funding. They can become investors for as little as $25 each, but this “social proof” is critical to the process.
“If you invite 15 - 25 of your friends to fund you that proves to the rest of the community that you are worthy of a loan,” says Shah. “It’s like a community credit score.” Indeed, it seems to hark back to lending a century ago, when loans were often made largely on the basis of the borrower’s character. Still, Kiva says 80 - 90% of the funds a borrower raises through the platform will likely come from strangers. The company reports that borrowers in the U.S. crowdfunded by Kiva have an 89% repayment rate.
How does an organization like Kiva Zip afford to make loans with no interest and no fees? They raise money in two ways. One is through foundations and large donors, and the other is through individual donors who may invest as little as $25 in a business. When I recently made my first loan on the platform, I was asked if I wanted to make a small donation (about $3.50) to Kiva Zip. PayPal provides free processing for all transactions.
Not all microloans are interest-free. “Rates all over the map, from 0% to low double digits,” says Halevy, who notes rates are often “slightly higher than a bank and lower than for-profit alternative lenders.” Some programs are able to offer lower rates thanks to government subsidies.
Battle repaid her first Kiva Zip loan on time, and was able to secure a second loan, which in turn helped her open a TopShelf Style retail store. “This year I really want to make a leap upward and invest in better brands and improve the experience for my customers,” she says, adding that she is also determined to grow e-commerce sales. She has also begun to build credit with a line of credit from her bank.
She hopes her experience will encourage other entrepreneurs who are running into financial roadblocks to seek out alternative sources of funding. “I want people to know it’s not too good to be true,” she says.
Gerri Detweiler is Head of Market Education for Nav, which helps small business owners monitor and build strong personal and business credit, and create financially healthy companies. She is the coauthor of Finance Your Own Business: Get on the Financing Fast Track with attorney Garrett Sutton.