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Microloans: Smoothing Out Business Startups

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David Truong looks like a young executive. Nattily attired in a tie and dress shirt, sleeves rolled up to his elbows and reclining in a leather chair, he may as well be evaluating some company for future investment.

In fact, he is. Only his surroundings hint at his nontraditional path to starting his own business.

Truong was born in Vietnam and came to America with his family when he was 5 years old. He went to St. Cloud Apollo High School, graduating in 2000, then found himself searching for a future.

"I was going to have to earn my way up -- nothing was ever given to me," said Truong, 30.

He worked in several entry-level assembly jobs, at Woodcraft and Electrolux. Then, in 2003, he visited an aunt in Georgia. She ran a nail salon, and Truong first got his indoctrination into a business he said is one many Asian people pursue in the United States.

"At first, I hated it, and I felt pressure by my parents," Truong said. "They were like, 'You know, this can be a good, steady business to go into for you.' Many people in our family have done this. Eventually, I realized there was some value in it. I like to make people look good. And if they look good, they feel good. That helped me develop a passion for it."

He went to cosmetology school in Minneapolis then served as manager of a nail salon in St. Cloud. But he wanted to be his own boss. He studied business at St. Cloud Technical & Community College in preparation for launching his own operation.

That helped, but it wasn't enough to make it happen. That's where the Central Minnesota Small Business Development Center (CMSBDC) came in and connected Truong with some microlending possibilities.

About six months later, with financial support from the Southwest Initiative Foundation, Truong opened Ultra Spa Nails in December in a strip mall at 2301 West Division St.

"I'm the type of guy who is dedicated and going to make something happen somehow," said Truong, who has four employees in his 1,300-square-foot salon. "But getting this help allowed me to do something earlier rather than later. My business took off like a rocket, so now I'm already trying to look five years down the road about what I want to do next."

Microlending

Some entrepreneurs find themselves with a good idea and a sound business plan. But many -- and especially for many immigrants or minorities -- they have little capital. As a result, it's hard to find a lender who is willing to work with them on a comparatively small loan.

Microlending is making very small loans to borrowers who lack collateral and don't have much of a credit history. It is perhaps more prevalent in developing countries and economies, but it has a place here, too, according to Barry Kirchoff, director of the CMSBDC -- which has offices in the St. Cloud State University Welcome Center at 355 Fifth Ave. S.

"It's tough to get small business loans through banks," Kirchoff said. "We work to connect individuals like David with consultants who can help them launch their business and connect them to sources of potential microloans."

In Truong's case, that consultant was Bruce Thielman, who has 20 years of experience in the banking industry. Thielman helped him through a business readiness assessment. Even though Truong had managed a nail salon before, how was he going to do things different? And if those differences translated into different expenses, how was he going to develop a plan to pay for them?

The no-cost consulting helps people like Truong identify and overcome the challenges they'll face. He also gets advice in setting up accounting systems, marketing plans, Web development and strategic planning. There are seminars in tax planning and financial management, among other topics.

"Typically, people who come to me have a business plan, and they may have an idea of cash flows," Thielman said. "I try to build on that. In many cases, as it was with David, a bank is going to look at his situation and say it's too small of a business to be involved with. At that point, we start to look for a microlender."

Southwest Initiative Foundation

Thielman connected Truong with the Southwest Initiative Foundation (SWIF).

"St. Cloud State has access to a small microloan fund, but it's capped at $5,000, whereas we can go far beyond that. Our limits are $50,000 in loans," said Berny Berger, microenterprise program coordinator for SWIF. "It's all about economic development. There's a social and economic purpose here because our clients are trying to build equity for themselves and better their own situation. Almost every business starts as a microbusiness. But over the years, they can grow, and then maybe they're employing 15 or 20 people. That's a great return on our investment."

A typical SWIF microloan, which can be for manufacturing, service, retail, child care and value-added agriculture businesses, is for about $11,000.

Truong needed something along those lines, although he was able to raise a majority of the funding to start Ultra Spa Nails on his own. In addition to Berger, Truong also worked with SWIF Program Officer Kurt Thompson to set up a Kiva lending program, a crowdfunding option similar to Kickstarter, that could produce another $2,500.

SWIF borrowers pay a fixed 7.5 percent interest rate and have up to 10 years to repay amounts for real estate, six years for equipment. They also must make monthly and annual financial reports. In return, SWIF provides free technical assistance for the life of their loan. Berger said loan loss has been less than 5 percent. The SWIF Microenterprise Loan Program, which also is available for expanding small businesses, is supported by the U.S. Small Business Administration and the U.S. Department of Agriculture.

"Our job is to fill a void, to serve an otherwise unbankable market and help these people find what they need to pursue their passion," Thompson said.

Capacity for more

According to Kirchoff and Thielman, the fastest-growing segment of small business are those owned by minorities and immigrants. St. Cloud continues to become more diverse, and the CMSBDC is taking steps to bridge the gap. This year, it will hire a bilingual consultant to work with the Latino community.

"Let's face it, 80 percent of small businesses fail in the first five years," Kirchoff said. "It's not easy, but 80 percent of those businesses that make it five years are ones that worked with technical assistance providers. That's because we're not a cheerleading squad. We ask the tough questions."

The CMSBDC has worked with SWIF on about five projects in the past two years, and both organizations say there is capacity for much more.

As for Truong, he knows the path to prosperity isn't smooth. But he's being coached and prepared for the times that are rough and the promotions that don't work.

"Financially, they helped me get to the next level," Truong said. "There was a salon for sale in St. Cloud for about $10,000 when I was thinking of doing this, but I'm glad I went this route because I'm much more proud of what I've been able to do. It's much more appealing. I didn't expect my first business to be like this."

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