Mentoring Before Money

By Abby Laub

To help budding food service entrepreneurs operate their fledgling businesses legally in Louisville, Community Ventures partnered with the city health department to open the Chef Space Kitchen incubator downtown. Pictured during the June 29 groundbreaking are, from left, Louisville Metro Mayor Greg Fischer, Louisville Metro Council President David Tandy, Federal Reserve Bank Regional Executive Maria Hampton, Chef Space President Johnetta Roberts, Community Ventures President and CEO Kevin Smith, Susan Barry of the Community Foundation of Louisville and U.S. Congressman John Yarmuth.
To help budding food service entrepreneurs operate their fledgling businesses legally in Louisville, Community Ventures partnered with the city health department to open the Chef Space Kitchen incubator downtown. Pictured during the June 29 groundbreaking are, from left, Louisville Metro Mayor Greg Fischer, Louisville Metro Council President David Tandy, Federal Reserve Bank Regional Executive Maria Hampton, Chef Space President Johnetta Roberts, Community Ventures President and CEO Kevin Smith, Susan Barry of the Community Foundation of Louisville and U.S. Congressman John Yarmuth.

Kentucky and its cities have climbed national listings recently in categories such as best places to raise a family, best places to retire and top travel destinations, but arguably the most notable ranking was the commonwealth’s jump last year to fourth in the State Entrepreneurship Index (from No. 49 a year earlier).

The federal Bureau of Labor Statistics declared Kentucky has the highest percentage growth of business establishments in the nation, and the state received an “A” rating from the Kauffman Foundation and thumbtack.com for small-business friendliness.

A look around the state at the support programs in place for budding entrepreneurs reveals, though, that this success should come as no surprise – it is a product of acting with intention.

“Kentucky has a very strong and committed group of small-business service providers,” said Michael Ashcraft, senior area manager for the U.S. Small Business Administration’s Kentucky District Office. “The folks who do the work across the state are incredibly smart, dedicated and passionate, and they all seem to love what they do.”

Fusion-Corp
Fusion Corp., a Lexington custom website, print, ecommerce and design firm, launched in December 2014 with a loan from Community Ventures. Pictured are, from left Kim Wilson, senior SBA loan administrator with Community Ventures; co-owners Daniel Boone, Michael Baer and Tim Raymer; and Kim Bennett, senior commercial loan officer with Community Ventures.

Last year, SBA and its resource partners in Kentucky directly served about 25,000 people with one-on-one counseling, educational programs and requests for information. It did not, however, serve 25,000 people with money. Technical support is where it’s at – eventually.

“Most people initially come to us or our resource partners asking for money, such as small-business grants, which are very competitive and usually applicable only to those companies that are performing, high-tech, fast-growth sorts of companies,” Ashcraft said.

“However, once an SBA employee or resource partner counselor talks to the person, often they discover that the request for loans or grants often is masking other challenges for the business, such as slow-moving inventory, lack of sufficient working capital, poor accounts-receivable practices, bad marketing plans,” he said. “That’s where the free one-on-one counseling services and mentoring become very important.”

Money is important and often is a component of aid provided, but mentorship is even more so – since everyone needs a good return on their loan/investment.

“I would say the most important thing we do is we get them ready, so when they do get the money they can use it correctly,” said Rick Johnson of state government’s Kentucky Innovation Network. “They’ll always tell us they need money, and sometimes they’re right. But many times they’re not ready for money. They need to add a key person or to fix a process, or to finalize a prototype.”

Lexington-based Community Ventures provides targeted financial assistance and education statewide. President/CEO Kevin Smith points to three types of impactful business aid, all with degrees of financial investment: support for micro enterprise (typically one- or two-person businesses) through micro loans; mid-range loans; and the federal New Market Tax Credit program.

Since it was founded in 1993, Community Ventures has focused on small-business support in all stages, home ownership and other community programs. From humble beginnings and a staff of one, it now manages more than $121 million in assets and has a 38-member team in five regional offices.

“If you’re looking at job creation and large community impact, then you have to point to the New Market Tax Credit program,” Smith said. “We’ve put $179 million into Kentucky communities through New Market Tax Credit investments, including $11 million to help rebuild the downtown area after the West Liberty tornadoes. We put $23 million into the Bowling Green downtown renovation, $24 million into Owensboro to do the riverfront, $11 million in the Galt House renovations in Louisville.

“When you’re looking at really making communities different and creating jobs, you just don’t find a program that can have an impact like New Markets Tax Credits,” he added.

Small loans have big impacts

Even though the amounts of money invested are not as impressive, Smith said, it’s the small-business microloans that do the heavy lifting over the long haul and directly impact families on a daily basis. Through business training and micro enterprise, families are able to better themselves and ultimately their communities.

“On average those loans are about $9,000 to $10,000,” Smith said. “Where we saw the power of the micro loans is in the Great Recession when the banks pulled back from business lending. We would make about 80 to 90 a year, but when recession hit we got about 250 loans a year. I think it was the entrepreneurs who brought us out of that recession. They continued to create jobs, and I credit this micro-loan program as part of what got us back on track.”

Ashcraft agreed with that sentiment. The SBA set an all-time record for SBA loan dollars in Kentucky in 2011 at just under $200 million.

Also “extremely important to the economy,” he said, are the in-between programs through which a mid-level entrepreneur might get a loan of about $1 million and immediately create jobs.

Community Ventures receives small business loan capital from a wide variety of sources. New Markets Tax Credits come from the Community Development Financial Institution fund at the U.S. Treasury Department and most of the micro-enterprise dollars come from the SBA, which Congress created in 1953.

“That is one government entity that has remained solid and responsive to our community and the economy,” Smith said. “They are much more in touch than sometimes they get credit for.”

Ashcraft credits SBA’s “lean and mean” eight-person Kentucky staff for this.

“We are all passionate about what we do, and we have a great network of resource partners and other small business service providers, lenders and others across the state,” he said.

The SBA’s resource partners, such as SCORE, Small Business Development Center, and the Women’s Business Center of Kentucky, often are the face of SBA. They provide free one-on-one counseling for small business owners and aspiring entrepreneurs across the state.

“Many people are not aware of all of the free resources available,” Ashcraft said. “My primary role at SBA is to visit with chambers of commerce and other economic development organizations across Kentucky to increase awareness about SBA, its loan programs and free small business counseling and mentoring services through our resource partners, as well as small business contracting and exporting opportunities and programs.”

Network of relationships leverages resources

Part of the way the SBA can get away with having a small staff is by working closely with the referrals it gets through its resource partners.

SBA gets client referrals, Ashcraft said, from chambers of commerce, local city and county governments, universities (all of the SBDC offices in the commonwealth are affiliated with a university or college), the Kentucky Innovation Network (KIN), the Kentucky Cabinet for Economic Development, many commercial bank and nonprofit lenders, as well as other business association contacts, like the Kentucky Retail Federation, the Kentucky Restaurant Association, the Kentucky Society of CPAs, and the Bar Association.

“So we have built relationships with these other organizations over decades, stay in touch with them regularly and keep each other informed often about with program updates,” he said. “The small business resource organizations, particularly in Kentucky, work well together, like each other and know each other very well.”

Johnson, associate vice president of KIN, which has 13 offices across the state, works closely with SBA and its regional offices. Each KIN office has a local partner organization – in Lexington it is the University of Kentucky; in Louisville it’s Greater Louisville Inc.; in Northern Kentucky it’s Tri-ED. It has a fund matching program with those state and local partners.

“So right away, we’re sort of not siloed,” Johnson said.

Kentucky Innovation Network works with many organizations for funding, like the National Institute of Health, the state Council on Postsecondary Education and many more in a competitive process that works to target dollars but also find the best partner possible for an entrepreneur or small business.

“If anyone wants to start or grow a business in the state, we’ll hand them off if necessary,” Johnson said. “We listen to them and make an informed hand-off if need be. If any state organization is looking for someone to help them achieve something, we will help them. Too many people think in silos, but we’re trying to think across everything.”

He echoed similar sentiments to Ashcraft and Smith. Most people need more than just money, and that’s why KIN offers mentorship and follow through.

“They’ll always tell us they need money,” he said. “And sometimes they’re right, but many times they’re not ready for money. They need to add a key person or to fix a process, or to finalize a prototype. So typically there’s a little bit of coaching and mentoring they need before that. I would say the most important thing we do is we get them ready, so when they do get the money they can use it correctly.”

The network coaches and prepares entrepreneurs to go before angel investors and venture clubs to pitch their idea to get funding, and it even holds pitch competitions. KIN also gets entrepreneurs “investment ready” and set up with a team of coaches, whether that is legal counsel, financial advisors or business planners.

“Kentucky has a wonderful set of integrated tools, statewide, to work with their entrepreneurs,” Johnson said. “And that’s been showing up in the rankings the last few years, of great places for startups … The climate here has been great. Kentucky has gone from near the bottom of the pack to near the front of the pack, and that’s because of these integrative programs.”

It is working and will continue to work.

Start-ups, and aid, vary by region

Big things are happening regularly, Johnson said, and they display the diversity of the commonwealth.

“In Lexington and Louisville, you have the two research universities, so the entrepreneurs are a spinoff that leverage the research dollars here; they tend to look more medical-related or high tech,” he said. “In Northern Kentucky it’s a little bit more industrial, the types of startups; that’s the nature of that region. Northern Kentucky University has an informatics department, so you see some software startups. The agricultural-based solutions are in the central and western part of the state.”

Johnson noted a far Western Kentucky start-up that, as a solution to a big invasive fish species problem in the Lake Michigan area, processes and packages Asian carp for foreign consumption.

In Morehead, many projects revolve around the internationally acclaimed Kentucky Space program based at Morehead State University.

In the Appalachian region, KIN officials are talking with younger and younger students about controlling their own futures. KIN also runs the Governor’s School for Entrepreneurs held annually for high school students.

“The idea, from an economic development point of view, is catching really smart kids and getting them thinking about starting a business, and maybe they won’t leave the state; they’ll create that great company here,” Johnson said.

Later, the same “really smart kids” will have a leg up in winning SBA grants, such as originations from Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), and State Trade and Export Promotion (STEP) grants.

Typically only about one in five SBIR Phase 1 research grant applicants nationwide get funding each year, Ashcraft said. For Phase 2 grants, about one in two get funding. For STEP grants, the dollar amounts are smaller (up to $7,000) but slightly more prevalent.

The state hopes some of the business-inclined students it takes an interest in now will take advantage later of some of the federal high-tech startup money that is available. Kentucky matches federal SBIR and STTR grant funds, dollar for dollar, the only state with 100 percent matching, not only for in-state businesses but also for companies that agree to move operations to Kentucky. The SBIR and STTR Matching Funds Program has awarded close to $51 million over the past decade and motivated nearly three dozen companies to relocate to Kentucky.

For business capital that must be repaid, SBA’s loan guarantee program and the Certified Development Company/504 Program for lending up to $5 million or more also are competitive in the sense that a business has to first go through rigorous preparation provided by SCORE, SBDC and the Women’s Business Center.

“The microloan program (amounts up to $50,000) is somewhat less competitive, but the businesses often must be involved with on-going technical (business) assistance from our microlenders across Kentucky,” Ashcraft said. “Kentucky has some of the best microlenders in the country.”

SBA is involved in 550 to 700 Kentucky lending transactions annually, nearly all of which are 7(a) general small business, 504 Program and microloans, he said, and its write-off rate is considered low.

The SBA even provides free lender training for banks across the state to ensure that lenders are always kept apprised of SBA policies and procedures.

 

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