Loan fund helps counties support entrepreneurs

Key Takeaways

Small businesses are not just a source of job creation and tax revenue for a county, nor are they just an ownership stake for an individual. From neighborhood shops to high-growth startups, a vibrant economy is a mosaic, each small business a tile that adds to a community’s character and resilience.  

A thriving small business ecosystem does not happen by accident and often, access to capital is the biggest challenge. Many financial institutions require evidence of credit history, revenue or collateral, which often lock out new entrepreneurs. Recognizing that barrier, the City and County of Honolulu made entrepreneurial financing an important part of its economic development strategy. 

O’ahu Small Business Loan Fund 

In May, Honolulu launched applications for a new program: the O’ahu Small Business Loan Fund. The loans, ranging from $5,000 to $50,000 at below-market interest rates, expand eligibility by using character-based underwriting and do not have credit score requirements. A total of $200,000 in lending capital is available.  

For underserved entrepreneurs who do not qualify for traditional financing, the loan fund is a game changer. The microloans fill a gap that allows an early-stage entrepreneur to get a business off the ground or to grow in ways that might otherwise have been out of reach. Moreover, the loans themselves serve as a first step for building the track record needed to qualify for future financing.  

Since the loan fund is structured as a public-private partnership with Feed the Hunger Fund, a nonprofit Community Financial Development Institution (CDFI), entrepreneurs also get to tap into the organization’s wrap-around support and expertise at no cost, which includes business coaching and financial literacy assistance. 

The small but mighty approach 

The City and County of Honolulu may have had a fixed budget of $40,000 for its program, but they leveraged private sector resources to build a more impactful one. Rather than the county lending money directly, the loan fund uses a loan loss reserve, a financing model that leverages an initial public investment to unlock private capital.  

In this model, county funds are held in a reserve while the CDFI uses its own capital to make loans. If an eligible loan defaults, the CDFI can draw from the reserve to cover its losses up to the total capped amount. In Honolulu, this arrangement increased the capital available to entrepreneurs at a 1:5 leverage ratio, with $40,000 in county dollars unlocking $200,000 in financing from the Feed the Hunger Fund.  

The county’s risk was capped at the $40,000 and the program has been able to extend more financing to directly target local and underserved entrepreneurs. For Feed the Hunger Fund, this arrangement reduces the CDFI’s lending risk by offsetting underwriting costs and providing a financial cushion.  

The small business loan fund demonstrates how counties can leverage public-private partnerships to stretch limited public dollars and amplify impact. 

“Leaning on the private sector with their already existing relationships and existing network was probably [our] number one effective tool,” said George Yarbrough, an Economic Recovery Corps fellow. 

Networks that deliver 

Honolulu’s Office of Economic Revitalization was envisioning a microloan program for some time, but bringing Yarbrough on board helped turn the concept into reality. Before joining OER as an Economic Recovery Corps (ERC) fellow, Yarbrough founded several successful startups in Hawaii and understood firsthand the financing challenges of entrepreneurs.  

ERC fellowships are federally funded by the U.S. Economic Development Administration and managed by NACo and the International Economic Development Council. The 30-month program embeds experienced economic development professionals like Yarbrough into local governments to add staff capacity, secure critical resources and advance local priorities, all while building lasting systems, practices and partnerships along the way.  

Yarbrough played a consequential role in introducing the Feed the Hunger Fund to Honolulu’s competitive RFQ process in search of a CDFI partner. He had first connected with the CEO of Feed the Hunger Fund when he was seeking capital for a previous startup, Hub Coworking Hawaii, which is now the largest coworking space in the state. At the time, Yarbrough did not meet Feed the Hunger Fund’s criteria, but he nonetheless stayed in touch with the CEO. As it turns out, the loan officer he eventually worked with for financing elsewhere is now also the Board chair of Feed the Hunger Fund.  

 In economic development, relationships are hard to measure and sometimes treated as intangible benefits, or worse: dispensable. 

Yarbrough is one of the main points of contact for any local business interested in learning more about the small business loan fund. He has seen four times as many applications come through in the first three months than he initially expected.  

Thinking through the long-term sustainability of the small business loan fund, Yarbrough has developed a program evaluation plan that includes quarterly reporting metrics for demand, loan performance and borrower impact. As his fellowship begins to wind down, he is working to set up a small business loan fund to evolve from a pilot into an ongoing program. He believes that the fund can be a great model for other counties.  

“You can do a lot with a little,” Yarbrough said. “We were willing to pilot the project and leverage $40,000 to create [a] $200,000… pot of money. You can start small and have very clear [objectives] and [key results] to be able to accelerate down the road.”