Yale students run bank

May 12, 2008 4:55:04 AM PDT
When Larry Thomas couldn't get a bank loan for his struggling construction business, he turned to Yale University students less than half his age.

Elmseed Enterprise Program, which provides small loans and intensive technical support primarily to low income and other disadvantaged entrepreneurs, is the first micro-financing program in the country run by college students, organizers say. It sparked a similar initiative last year by Harvard University students, while Georgetown students are planning a program in Washington D.C., Rutgers in New Jersey and others such as the University of Rochester in New York are considering starting programs.

The programs aren't affiliated with universities, but give students hands-on experience in working with struggling businesses. And because students are volunteers, eliminating labor costs, Yale students say their involvement has enabled Elmseed to achieve what many of the nation's 500 or so other micro-financing programs have not: self sufficiency.

Thomas, 47, of New Haven, credits Elmseed with helping him turn around his construction business, which now has up to 10 employees and will do $500,000 to $1 million in business this year, up from $50,000 five years ago.

"I just can't say enough about them," Thomas says. "It's a very, very vital part of my success."

Rutgers students are starting to raise money for a program and hope to create a national network of student-run microfinance programs by offering matching grants when students form chapters at their colleges.

"We think with the student model it has a chance of catching on nationally," said Rohan Mathew, a Rutgers student involved in the effort.

Elaine Edgcomb, director of financial programs at the Aspen Institute, has not studied Elmseed, but said it could serve as a model for other micro-financing programs if it can provide consistent support and expertise while relying on student volunteers.

"It is very hard for programs to cover all of their lending costs," said Edgcomb, who has studied the programs extensively.

Thomas says there was no let up in support, with students urging him to make time for meetings even when he was busy with the business. They brought in a lawyer, an accountant and even a marketing expert from a Hartford television station.

The students helped Thomas see that his sheetrocking business was not that profitable, so he branched out to windows, doors, and bathroom renovations. As he made more money, he bought tools instead of renting them.

And Thomas was able to get a $1,500 loan. When he repaid that, he got a $3,000 loan.

Elmseed, which is funded with federal grants and donations from banks, foundations and individuals, was founded in 2001 by four Yale undergraduates who were inspired by the microcredit model used in the developing world and by similar initiatives in the United States.

A board of directors comprised of banking executives and other experts gives final approval to loans. The program is not affiliated with Yale.

Instead of collateral, Elmseed relies on peer pressure. Borrowers join a group in which everyone must be current on their loan payments in order for the next borrower in the group to receive a loan.

More than 90 percent of clients repay loans, according to program officials.

The concept is not new, but won renewed attention after economist Muhammad Yunus and the Garmeen Bank he founded won the Nobel Peace Prize in 2006 for pioneering the use of microcredit to spur creation of small businesses in poor nations.

Microfinance programs have been somewhat slower to expand in the U.S. because of scarce resources and costs, according to Edgcomb. She has urged microenterprise organizations to merge and use technology to serve more people.

Some programs have made progress toward self sufficiency and research shows many are effective in boosting income and sales, Edgcomb says. Some even expand into larger businesses that create more jobs.

A 2005 Aspen Institute study of 17 microenterprise programs across the country interviewed 813 clients and found that employment had increased 111 percent since participating businesses entered the programs, Edgcomb said. A five-year study of clients in the 1990s found that median household income increased by 91 percent and that 72 percent of 133 low-income entrepreneurs reported income growth, Edgcomb said.

"We see real gains in terms of what happens to clients of these programs," Edgcomb said.

Elmseed has given out 22 loans, totaling $46,000, according to Heather Soleau, a Yale freshman who handles Elmseed's public relations. She says she likes how a small amount of money can make a big difference in someone's life.

"It's very fascinating and very promising," Soleau says.

Daniel Fierro, a Yale sophomore involved in the program, said the first few meetings with clients are "a little odd" given the age difference. But he says the program gives Yale students a chance to see another side of life before they enter investment banking and other fields.

"It's given me a lot of perspective," said Fierro, who's thinking of becoming a public service attorney.

Jo Anne Sims of Hamden turned to Yale students who are her grandchildren's age to help her with a new cleaning business.

The students wound up helping her with every aspect of her business, including starting a Web page, narrowing the focus, prices and taxes. Sims is busy these days, even hiring her son and grandson who had been unemployed.

"They've helped me a lot," Sims says. "I would probably just be sitting around. I would possibly be more confused without a clear cut game plan. If you don't have a road map you're essentially lost."

Sims, a 57-year-old Hamden resident who retired from her customer service job at AT&T, says she doesn't mind taking advice from college students.

"I know these kids are savvy, very computer savvy," she says. "I know a lot of people in my generation are not."

Sims has not applied for a loan yet, but plans to eventually. She hopes to serve as a mentor to at-risk high school students and show them how to start a business.

Sims is convinced self-employment will become increasingly important because good paying jobs in factories and other big companies have left the region for cheaper labor down south and abroad. She said her grandson was struggling to find work.

"It means everything to me to be able to not only employ my family but also to show them how you can stand up and learn and have a business that is viable and not have to just be unemployed," Sims said.