Lending for the Long Tail

The future belongs to businesses serving tiny consumer niches, it is said. Take, for example, the toilet decal market -- the brainchild of Etsy seller vital. Totally brilliant idea? Yes. On tap to become a market with sales like Coca-Cola? No.. but of course, that is not a problem.

Many of the businesses creating and supplying a niche market are tiny organizations themselves.

Yet our institutions that support small business - banks, the government's Small Business Administration, local community organizations, and so on -- are not well-configured to support entrepreneurs with low startup capital requirements, especially young people.

What's the next step in the Niche Revolution? Improving very small businesses' access to very small amounts of credit.

Small businesses built on their Internet presence are often cheap to start. Many entrepreneurs still need an infusion of capital, however, if for no other reason than they need to pay rent. Early part-time employees or lawyers, accountants, and other professionals paid by the hour may also need to be hired.

As a result, loans -- in the form of credit cards, money from family and friends, home equity lines of credit, etc -- very often figure into a small business person's strategy.

I think it is self-evident that credit cards and family loans can be a less than ideal source of funds for a business. High interest rates? Interpersonal complications? Yup, it's a messy source of capital. (And don't even get me started on the virtual impossibility of young people ever buying real estate in places like San Francisco.)

The idea of lending to small business people on the Long Tail has not been fully explored.

This is odd, because we have a well-developed existing theory and organizational structure for funding entrepreneurs with modest capital needs and minimal assets or credit history.

Microcredit -- small loans to entrepreneurs, for the most part in developing economies -- is becoming widespread around the world. To some extent, microcredit also exists in the United States. One organization I interned with in college is Washington CASH, which lends to low-income women and people with disabilities. For the most part, microloans are offered by nonprofit organizations, though some for-profit companies exist. Indeed, Compartamos in Mexico recently issued the first IPO in the microcredit industry.

Here in the US, though, we still do not have a good financial system for "pre-bank" niche businesses. By pre-bank, I mean small companies that do not yet have the proven cash flow or assets required by a bank to get a standard small business line of credit or loan. (I also refer to companies that do not require or aspire to large scale -- because if they did, they would most likely look to venture capital or other sources of bigger loans.)

While niche entrepreneurs often lack access to bank lending, nonprofit organizations seldom fill the void. Many Americans starting these microbusinesses are young and well-educated, but with low current income and net worth. Some of them are even male -- a big no-no in the world of traditional microcredit. Nonprofits often do not consider these types of entrepreneurs as their target demographic.

What to do? Perhaps not surprisingly, new Internet-based businesses are springing up to fill the void. In my next post, I'd like to share some resources for entrepreneurs looking to take their capital raising from the "Dad and MasterCard" route to the next level.