Needy Firms Seek Out Grass-Roots Loans : Recovery: Eighteen months after the riots, there are few alternative funding programs in full-scale operation. The focus remains on entrepreneurial small businesses.

When Kenneth Mitchell needed a set of saws to expand his tiny South-Central Los Angeles contracting business last year, he was quickly rebuffed by the federal Small Business Administration.

“They told me: ‘You’re too small, you haven’t been in business long enough and you don’t own a house for collateral.”’

Instead, they directed the father of five to the Coalition for Women’s Economic Development, one of a handful of alternative lending sources available to low-income Los Angeles residents who are intent on building their own businesses.

Now, when Friday nights roll around, Mitchell, 32, heads Downtown to meet with four buddies. But rather than musing over beers, they sit in a Spartan seventh-floor meeting room at coalition’s headquarters and discuss business planning, minority contracting and, when the need arises, how to avoid being stiffed by a customer.

The five entrepreneurs--an optometrist, a fashion designer, a mini-blind cleaner and two contractors--have each received $5,000 loans from the coalition’s novel peer lending program.

Created before the 1992 riots but bolstered shortly afterward with a $750,000 SBA loan, the Coalition for Women’s Economic Development micro-loan fund is frequently cited as the most successful alternative lending program for affording low-income Angelenos a chance at creating their own businesses.

Indeed, 18 months after the Los Angeles riots, the coalition remains one of the few alternative funds in full-scale operation.

Only in the last two weeks have three such lending programs made their first loans. However, each of these loan funds is geared toward helping established businesses rather than new ones--at the same time that government funds are being poured into entrepreneurial training programs for inner-city residents with dreams of opening their own businesses.

With the downsizing of major corporations and a dearth of government funding for job programs, community leaders have increasingly envisioned small business as the fiscal salvation for neglected neighborhoods of Los Angeles.

But most of the 55,000 mom-and-pop businesses operating in poverty-stricken areas take in too little income or have insufficient collateral to qualify for loans from traditional banking sources.

Two weeks ago, RLA’s Community Lending Corp., which since July had postponed four scheduled news conferences on the subject, finally announced the recipients of its first three small-business expansion loans for firms that are unlikely to receive commercial loans. RLA, which was created last year under the name Rebuild L.A. as the city’s primary response to the civil unrest, committed $150,000 to $230,000 to Latino and African-American owners of existing waste disposal, transmission remanufacturing and contract sewing businesses.

Last week, the Community Financial Resource Center, a nonprofit organization of bankers, city officials and community organizations, funded its first business loan, for $155,000 to a South-Central Los Angeles garment cutter that has been in business since 1964.

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The Southern California Business Development Corp., a consortium of 23 California banks prodded by federal regulators to make money available to inner-city businesses that do not qualify for conventional funding, also approved its first loan, for $30,000, last week. The Development Corp. and Resource Center, which share an office just south of the Coliseum, had both been in the planning stages for three years.

Still gearing up is SEED Inc., a lending program financed by the Roman Catholic Archdiocese of Los Angeles that will target existing Pico-Union businesses that are seeking expansion loans of $25,000 to $75,000.

Since the riots, the entrepreneurial spirit has taken hold in many low-income communities.

“Starting a business gives you the opportunity to become an owner, thereby creating jobs within your own community,” said Joe Gardner, director of an entrepreneurial training program at the Bethel African Methodist Episcopal Church in Southwest Los Angeles.

With little publicity, RLA’s Community Lending Corp., an independent nonprofit offshoot of RLA, has received 1,500 inquiries, a majority of them from people seeking to start businesses. The first session of a privately funded post-riot entrepreneurship program at the First African Methodist Episcopal Church in South-Central Los Angeles drew more than 300 participants, according to project manager Darcelle Dixon-Hunt. And at USC, a community outreach program that predates the riots regularly draws capacity enrollments.

In response to the burgeoning interest, about $3 million in state riot recovery funds has been targeted for programs that provide instructions in market research and business planning.

Early this year, the council allocated $148,000 of state funds for the ongoing Bethel AME program and $405,000 for a pair of similar San Fernando Valley programs, one that offered a training course for prospective street vendors.

Last month, the Los Angeles City Council targeted another $827,498 to 11 additional programs for more than 700 inner-city residents hoping to start businesses.

Schools and organizations participating include Cal State L.A. and Crenshaw High School, where students are developing a line of “Food From the Hood” salad dressings spiced with herbs grown in a formerly weed-choked patch on school grounds.

Jon P. Goodman, director of the Entrepreneur Program at USC’s School of Business Administration, said the more training programs the better.

“You’re dealing with irrigation on a parched field,” she said. However, Goodman cautions against heightened expectations. As is the case with business anywhere, only a handful are likely to succeed. “We cannot create entrepreneurs,” she said. “But we can train someone and give them the set of skills that is an absolute prerequisite.”

The other caveat is capital.

“The success rate depends not only on dedication but also on the funds to start and to keep the doors open,” Gardner of Bethel AME said. “The bottom line is the dollars to start a business.”

Unfortunately, inner-city residents and their families rarely have enough cash of their own to draw upon. And traditional banking sources are generally out of the question for starting businesses.

RLA Co-Chairman Barry Sanders said financial risk deters alternative loan programs such as RLA’s from lending to new businesses. And those that even consider doing so generally lend no more than $5,000.

“The history everywhere is that start-up businesses have a poor prognosis for survival for more than two or three years,” Sanders said.

Indeed, even if the standards were eased, RLA’s experience illustrates the pitfalls of an urban revitalization strategy that relies too heavily on starting and expanding small businesses.

The agency’s first three loans totaled $530,000 or nearly one-tenth of its entire $5.75-million lending fund--and are expected to generate 34 new jobs. In contrast, 57,000 to 94,000 new inner-city jobs are needed to revitalize the economy of Los Angeles’ impoverished neighborhoods, according to post-riot estimates prepared for RLA.

Still, with few new sizable businesses except for supermarkets opening in riot-ravaged neighborhoods, small business is nearly the only game in town. There are some invigorating success stories, such as Dulan’s, a thriving Southern-style restaurant where staffing has skyrocketed from six to 40.

Owner Greg Dulan used his credit cards to finance the Crenshaw Boulevard African-American eatery--and shortly after opening in the wake of the riots, he received loans through the Pacific Coast Regional Small Business Development Corp. and from the First AME Church’s FAME Renaissance micro-loan program.

Pacific Coast, established in 1977, administers a state program guaranteeing up to 90% of a bank loan to small businesses in neglected neighborhoods. The program generally employs traditional bank lending standards in which credit is granted only to businesses that have adequate collateral and been operating for several years.

An exception was made to guarantee a $100,000 bank loan for Dulan, said Pacific Coast President R.D. Lottie Jr., because he owned the property where the restaurant is located, sunk his own assets into the deal and had lengthy restaurant experience.

The additional $20,000 from First AME’s micro-loan program was used to purchase kitchen equipment and meet the restaurant’s expanding payroll.

FAME Renaissance was started with $1 million in post-riot grants from the Walt Disney Co. and Arco. Thus far, $519,000 has been lent to 34 businesses, including a new cosmetics shop in Inglewood and a bus company that runs tours across the state.

To qualify, business owners must also enroll in either the First AME or USC business training program.

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A second micro-loan program started after the riots is the Los Angeles Women’s Entrepreneurial Fund. Thus far, the fund, created by New York stock brokerage owner Muriel Siebert and administered by the California Community Foundation, has lent nearly $150,000 to 17 small businesses including the 50-year-old 27th Street Bakery and Hmong needlework artist See Lee of Long Beach.

Lee, a mother of six whose supplies were looted from her garage during the riots, paid back a first loan of $1,000 before it came due and has since been lent an additional $10,000 loan to expand her work and open a Hmong art museum.

The Coalition for Women’s Economic Development, whose typical loan is $1,500, assists small businesses ranging from operators of swap meet booths to dry cleaners to street vendors.

Based on a model imported from Bangladesh, loan-seekers form groups of five called solidarity circles and meet for nearly three months to learn more about one another and their businesses. Then two members of the circle receive their loans and must make two initial payments before the others qualify for funding. Regular meetings continue until the loans are repaid and members are jointly responsible for the repayment.

Coalition officials say such shared responsibilities make for better business practices. In its first 3 1/2 years of operation, the organization has granted 98 loans totaling $221,000 with a 92% repayment rate.

Tom Stuart, a Pasadena optometrist in Mitchell’s solidarity circle, bought equipment with his $5,000 loan.

“If you have a small business going, it can make a difference,” Stuart said. “(Besides), you look forward to meeting with the guys and sharing business ideas.”

On a recent Friday night, Stuart and Mitchell ribbed fellow circle member Eugene Randolph about his expensive cow-skin boots.

“Road kill?” Mitchell asked the fellow contractor.

Later, circle members consoled Mitchell about a $600 loss he had suffered when a client refused to pay for a set of architectural plans.

“That was the first time and hopefully it will be the last,” Mitchell said. “Next time I have to get that contract signed first.”

At the end of the meeting, Mitchell asked whether the next session could be switched to a weekday afternoon. With business slow, he had just agreed to take an evening job as an airport bus driver for a car rental company.

“I don’t want to put anybody out,” Mitchell said. “But I don’t want to leave the group.”

“You can’t,” replied coalition counselor Gayle Carter, with a smile. “You owe $5,000.”