By Elise Hunter, MBA/MS candidate at Erb Institute, University of Michigan
Steady access to capital is still a long ways off for pioneering local food entrepreneurs in Detroit. However, cooperation amongst entrepreneurs and mounting advocacy for innovative business structures are bringing secure funding into the horizon.
Detroit's local food pioneers are transforming the fallow landscape and bringing nutritious cuisine to eager restaurants and families all across this notorious food desert. Despite demand from the community, many of these entrepreneurs are struggling to secure capital. This may be exacerbated by Detroit's recent bankruptcy, as some are speculating that services could be cut, and city bondholders may not see steady returns on those investments. The path to stable funding is complex and subjective, but enormous strides can be made with better enterprise planning on a micro scale and policy advocacy for alternative business models on a macro scale.
Earlier this year, I worked on a marketing research project for the Fair Food Network (FFN), assessing how Detroit local food entrepreneurs approach financing. The results were startling: out of a group of over 30 entrepreneurs surveyed, 62 percent said that they had used personal savings and credit cards to finance their businesses, yet only 26 percent reported planning on using these sources in the future. A staggering 64 percent of the entrepreneurs aspired to finance with grants and donations, but only 45 percent had successfully done so in the past. Moreover, only 5 percent had successfully gotten commercial bank loans. While the surveyed group may not be fully representative, it nevertheless signals the need for steady funding that allows innovative local food businesses to prosper.
Part of the problem is that many newly-minted entrepreneurs have no financial track record to prove viability, or their businesses are so unconventional that traditional methods of valuation do not apply. When Alex Bryan and Noah Link launched their 4-acre organic farm, Food Field, commercial banks rejected them. Typical agricultural loans estimate revenues based on a model that favors large, monocrop farms, not a small community supported agriculture (CSA) operation with variable crops that yield different margins throughout the year. Also since crops are perishable and seasonal, farmers often must invest quickly or risk losing their inventory. "Young or beginning farmers can be forced to put down eight thousand dollars for a tractor on a credit card," which is a rounding error for a large farm, but devastating for a small operation, explains Bryan.
Entrepreneurs in this beginning stage sometimes need only small amounts of funding for very specific capital investments, a need which seems to fit the mission of microloans. FFN's Meredith Freeman says that entrepreneurs would benefit greatly from microloans, but many of the small loans available on the market carry exorbitant interest rates, and entrepreneurs can get lower rates from personal credit cards. To avoid this risky burden on personal credit, FFN is launching its own microloan program featuring patient and flexible terms. Both the interest rates and the duration can shift according to business's fluctuations, meaning that FFN will have a closer relationship with entrepreneurs than the typical arm's-length bank loan. FFN does not require a history of strong profits, but entrepreneurs do have to have credible business plans. "It has to be more than just a good idea," says Freeman.
However, microloans, even when patient and flexible, are not suitable for every business. Jenile Brooks, founder of online local food delivery service Harvest Express, explains that microloans must be very focused in their funding goals, otherwise the coordination costs may not be worth the effort for such low amounts of money. Brooks' cost structure -- fleets, large delivery equipment, IT -- does not cleave easily into small bundles for microloans. Brooks hopes for a larger credit line to augment her initial startup grant. Given the reluctance of the commercial loan industry, this sounds like wishful thinking -- at least for now.
The scarcity of capital is causing a myopic focus on money that overlooks other crucial steps to forming a business. Jess Daniel, a local food advocate who runs Food Lab Detroit, an enterprise incubator, says, "so many entrepreneurs hear that there's no access to capital in Detroit and they think, 'I just need money!' when many of them haven't yet thought through why they need it or how they'll pay it back." Thinking more thoroughly about business structure can sharpen options, since funding opportunities depend both on legal structure and chronological stage. Daniel and Food Lab provide a vital service to entrepreneurs simply by connecting them with one another; they help clarify business niches and market opportunities, and strategize on navigating the murky waters of grant proposals, loan applications, land acquisitions and other hurdles.
A stronger initial focus on business structure is sparking innovative policy changes that would ultimately lead to better relationships with investors. In the Michigan legislature a draft benefit corporation law is languishing. This law would formalize a new for-profit legal structure in which directors must take social and environmental considerations into account. Business leaders would be less beholden to the pursuit of maximum returns, and can more easily bolster sustainability without being accused of breaching fiduciary duty to shareholders. Since many local food businesses have both for-profit activities and social justice or environmental benefits, they should receive investment based on outcomes beyond pure finances. Daniel wishes that it were easier for businesses to be structured as for-profit and non-profit hybrids, allowing them to raise funds through foundations as well as private investors, such as low-profit limited liability corporations.
Notoriously conservative government agencies are changing age-old policies, considering different metrics for funding evaluations. Alex Bryan influences the USDA's loaning arm, the Farm Service Agency, through his seat on the National Young Farmer's Coalition. The NYFC's suggestions made it into a recent Farm Bill amendment: less paperwork and longer loan periods for small and beginning farmers. Bryan's advocacy efforts paid off for him personally and his CSA customers - Food Field eventually secured an FSA loan. Given these shifts, Brooks' vision for credit lines to local food entrepreneurs may not be so far off in the distance.
The daring local food entrepreneurs of Detroit are demonstrating that financing opportunities do not lie in the stark choice between risky personal credit splurges and fleeting grants, but in alternative financing structures, collaborative strategy sharing, and widespread policy advocacy.
Elise Hunter is a writer for Student Reporter. We are a journalism incubator and online media outlet, providing media coverage of events and featuring current topics in management and economics around the world. This post is part of a series produced by The Huffington Post and the Schwab Foundation for Social Entrepreneurship, in recognition of the latter's Social Entrepreneurs Class of 2013. To see all the post in the series, click here. For more of our work, visit us on studentreporter.org.