The Bucks Start Here : Unable to Obtain Traditional Loans, More Entrepreneurs Are Taking a Chance on Cash Pools

Once a week at a swap meet booth in Westlake, several Latino merchants each contribute $250 to a cundina , an underground lending pool that is part cooperative and part bank. Each week for 10 weeks, one of the group’s members receives the $2,250 pot.

In Koreatown, members of a crime-prevention team met monthly at a restaurant, $500 in hand. One month at a time, each used the $2,500 to buy a ham radio so team members can communicate while patrolling their neighborhoods.

And in Southwest Los Angeles, 30 people attend monthly meetings of one of the more than 50 “family investment teams” that have sprouted in the African-American community since last spring’s riots. Each person pays $38.66 a month toward the goal of one day buying property in and improving black neighborhoods.

For centuries, many cultures have practiced group lending as a means of raising money for weddings, burials and other occasions. But in Central Los Angeles, communal lending circles are flourishing for different reasons. They have been fueled by waves of new immigrants, who make up half the area’s residents, and the ambition of people unable to qualify for bank loans because of poor or no credit.

“Nobody loses; everybody wins. We all use each other’s money,” said Javier Becerra, a Mid-Wilshire resident who uses cundina funds to invest in his small herbal tea business Downtown.

Experts say group lending and saving circles also have been discovered by organizations helping micro-entrepreneurs, who are generally defined as business owners employing fewer than five and needing less than $5,000 for start-up.

Police say these underground lending circles are legal. However, the practice is not without risks. Members have been left empty-handed by shady participants who take off with everybody’s money. And people who rely solely on lending circles can be shut out of the mainstream financial system, experts say.

People who are “really living on the margin” can benefit from community lending, said Paula Sirola, program manager for the Coalition for Women’s Economic Development. “And if that’s what it takes, fine. But there’s also the risk factor.”

The Downtown-based nonprofit coalition has used lending circles for several years to run a successful micro-business loan program for inner-city women. The organization has lent nearly $154,000 to 80 low-income women since 1990.

Because of the underground nature of these lending circles, experts are unable to estimate how widespread they are.

In the Latino community, cundinas are popular among the immigrants whose small businesses fill swap meets and strip malls from Westlake to South-Central. Many participate on a regular basis, starting up a new lending circle once all the members receive their money.

As the organizer of her cundina , Maria Eva Mejia collects $250 from each of the nine other women in her group, excepting the one who receives the weekly pot (Mejia also contributes a share). Generally, those with the greatest need receive their pots first. But on other occasions, the women draw straws to determine the order in which the money is disbursed.

“We do it out of necessity,” said Mejia, 50, a Salvadoran immigrant whose original clothing business in Pico-Union burned to the ground in last spring’s riots. “No one else is helping us. So we have to help ourselves.”

Unable to qualify initially for a federal disaster loan because she lacked the appropriate business documentation, Mejia started up two cundinas with 19 other merchants. Mejia said she used her $4,750 share from the two cundinas to buy clothing and rent space at the Westlake Swap Meet. She eventually received a $27,000 loan from the U.S. Small Business Administration after she and others lobbied the director of the agency’s disaster loan program.

Mejia said the 10 members of her current cundina are close friends; three of them work with her at the same swap meet. In other groups, the members sometimes do not know each others’ identities.

“Above all, (the cundina ) is a system based on honor and trust,” said Alfonso Castro, who uses money from his lending group to reinvest in his Pico-Union convenience store. Castro said banks have turned him down several times for business-expansion loans because he did not have a credit history or enough collateral.

Castro said he knows only the organizer of his cundina , who visits each business when it comes time to collect the $250-a-week contribution and pay out the weekly $2,250 sum.

“It’s not important who is playing. It’s important that we get the money,” he said.

In Castro’s native Guatemala, the lending circles are called cuchubals . Mexicans and Salvadorans use the term cundina or tanda . The custom of using the circles has been in existence for generations to finance everything from business ventures to burial services.

Among Asians, group lending dates back centuries to village customs in Korea, Japan and other countries. The groups can also serve as an informal social club, where friends gather to eat, drink and gossip.

Among Japanese, there is the tanomoshi . “They’re popular among very close friends,” said Tokiyuki (Tom) Yokoi, a manager at Sumitomo Bank.

He said the tanomoshi originally evolved from social groups in pre-industrial Japan and evolved into lending circles. As with the Latino cundinas , each participant pays a weekly or monthly amount. However, in addition to their regular contribution, the members place bids to determine the order in which members will receive their share of the pot, Yokoi said. The bid money goes to the organizer of the tanomoshi.

Similar to the tanomoshi is the Korean kye (pronounced “kay”), a village tradition that began centuries ago and was transplanted here with the influx of tens of thousands of Korean immigrants during the 1970s and ‘80s. In Koreatown, the kyes are used at all economic and social levels.

“It’s way better than banking. It’s instant cash right away,” said Jaeis Chon, vice president of IJ Healthfood Corp. in Koreatown. Chon, who recalls his mother using kyes during his childhood in Seoul, says he is almost always involved in a kye .

That is how he and five other businessmen in the Koreatown Ham Radio Team bought their portable radios that pick up police frequencies.

Once a month during the past year, the six met at a Koreatown restaurant, where they ate, drank and, except when it was each member’s turn to collect, contributed $500 to the kye pot. Within six months, all of them had purchased $3,000 radios. That kye ended recently but they plan to start another one soon to finance team activities and buy police radio scanners.

Chon said that many Koreatown residents are in two or three kyes at a time. As many as 20 to 30 people can be involved in a single kye , contributing from $1,000 to $2,000 a month to the communal fund.

An oya , or organizer, is responsible for collecting the money. In the larger kyes , there can be four or five oyas who supervise as many as five members. Like their Japanese counterparts, Korean players often make sealed bids with additional money to determine who receives the cash first. The extra money from the bids goes to the organizers.

Inspired by the success of the kyes , members of the African-American community have recently started group savings clubs called family investment teams. Their goal is to help members buy property in their neighborhoods, organizers say.

Annie Pierce, a community newspaper publisher who helped organize the teams, said she had heard of the success of the Korean kye and was prompted to act last year after she drove past rows of burned-out buildings in South-Central. She said African-Americans have to help themselves if they are to have a stake in their communities, which have been largely ignored by major financial institutions.

“If you have no access to capital, you create your own private money and you loan it to yourself,” said Pierce, whose Los Angeles Community Circle Clipper newspaper circulates twice a month in the southwest part of the city.

She said more than 50 teams, involving about 500 people, are in different stages of formation from South-Central to Compton. Each member pays $38.66 a month, and the money is deposited at black-owned banks and savings & loan institutions. She said each team is incorporated as a business, with officers whose names are on the bank account. Each team can invest its money independently or pool its funds with other teams.

Pierce said the teams are still recruiting members and raising funds, and she would not say how much they have collected. So far, no property has been purchased.

Although the main purpose of the teams is to raise money, many of the participants are business owners and professionals who teach skills such as writing business plans and money management to others during the monthly meetings. The teams also function as a support group.

“It’s a real family,” said team member Leaster Clutchette, who manages several inner-city apartment buildings. “If I’m ever in any kind of difficulty, they’ll be there to back me up.”

On a recent weekend, in the back room of a small business in Southwest Los Angeles, Clutchette and about 30 others began their meeting with a silent prayer. A team leader read minutes from the previous meeting, and then participants began the day’s instruction by listening to a local real estate agent explain how to research one’s credit history.

Elsewhere in the nation, savings groups, like those of the family investment teams, are being used by organizations involved in micro-business development, said Sirola, of the Women’s Coalition. She added that several organizations throughout the country have incorporated savings groups into their training to teach banking skills and goal-setting.

Yet for all the optimism surrounding group lending, they are not foolproof.

In some cases, organizers will guarantee the money. However, Latino cundina members and Korean kye players tell of members or organizers who occasionally take off with the funds.

“That’s just part of the risk,” said Kwang Lee, a Koreatown businessman. He said he lost several thousand dollars last year when an organizer left with the kye money--just before it was Lee’s turn to get paid.

Mejia, the swap-meet organizer, said she lost about $2,000 last year when her cundina fell apart after the riots. The members, all of them swap-meet operators, lost everything when their businesses burned down and were unable to continue contributing to the pool.

However, neither Mejia nor Lee reported their losses to authorities because they thought it would be useless. Police say such cases are difficult to investigate because immigrant participants are often hesitant to come forward because they are fearful of authorities or are here illegally. Another problem is that most of the circles have no records of money transactions.

There are also other risks.

Daniel Morales, a consultant with the state’s Small Business Development Center, pointed out that although lending groups are fine for coping with short-term cash problems, people who rely solely on them are less likely to use banks or establish a credit history needed for business and personal loans. That, in turn, could hinder long-term business development, since a lack of credit history is one of the main hurdles facing inner-city entrepreneurs.

Nonetheless, members of these community-lending circles see them as a way for people to help themselves.

At the recent weekend meeting of the family investment team, Pierce announced she had found a property in South-Central, a three-bedroom house and dry-cleaning establishment for $145,000. She said the different teams could purchase it if they came up with a $28,000 down payment. Team members are looking at ways to finance the venture, Pierce said.

“We have to step out there and be aggressive,” Pierce told the 30 members. “When we’re together, we have power.”