Jul 07, 2010
IDAs - Small Boost to Entrepreneurs
At a time when many people are short on income, some start-ups are finding relief in a little-known resource—individual development accounts. These accounts, aim to help low-income individuals purchase homes, pay for higher education or develop a small business. IDAs are typically offered by nonprofits, state or local agencies and low-income credit unions, which raise private funds and combine them with federal funds to match an account-holder's savings. Program coordinators are seeing entrepreneurs beginning to use the accounts to start enterprises with low upfront costs, such as catering, cleaning, landscaping and children's day-care businesses.
Jenny Robinson opened her IDA at New Visions, New Ventures, a nonprofit community economic development organization in Richmond, VA. Ms. Robinson started her own business, Cracked Egg Bakery, selling homemade cheesecakes to two local restaurants. By February 2009, she had saved $2,000 in her IDA, and secured a matching grant of $4,000, which she then used to expand her at-home bakery, which now sells cakes to eight restaurants and a farmer's market. "Luckily we can accommodate almost anything right now."
The grants, which typically match $2 for every $1 a participant saves, tend to be relatively small: The average amount of savings plus matching funds disbursed for small-business development was about $3,800 at the end of 2008. But combined with required financial literacy courses and business coaching, they can offer the boost some entrepreneurs need to get their businesses off the ground.
"The IDA can be a great way for somebody to take a careful run at starting a business," says Eric Weaver, chief executive of Opportunity Fund, a nonprofit in San Jose, CA, that provides microloans, real-estate financing and individual development accounts to low-income families. "A lot of people are either not ready for a loan because they don't want to take a risk or they may have some credit issues."
Vicci Smith used the savings from the IDA she opened through Opportunity Fund to launch a life-coaching business in San Jose. After putting away about $2,000 over two years, Ms. Smith received a matching grant of about $4,000, which she used to pay for her business license, office equipment and marketing materials.
How to Qualify
Individuals may meet program requirements if they are eligible for the Federal Earned Income Tax Credit, or have an adjusted gross household income less than twice the federal poverty line. Net worth also must be less than $10,000, not counting a person's primary car or home. Those eligible for the Temporary Assistance for Needy Families program may also qualify.
Once opening an account, participants must make regular weekly, monthly or quarterly deposits as required by the organization offering the program. Participants may be required to complete financial literacy and business training before they can receive the matching grant. The size of the match ratio varies between 1 and 8, with a maximum federal grant of $2,000 per account. Private matches can be greater. Participants who decide they no longer want to invest in a small business or other approved purpose can get their savings back, but not the matching grant.
The financial-literacy courses Vicci Smith received as part of the program have helped her understand how creditors are interpreting her finances. In addition, a small-business adviser reviewed drafts of her business plan and offered tips on how to market her business. "If I hadn't had them, I would have had to piece together everything on my own and that may have never come together," says Ms. Smith.
In general, the total number of IDAs tripled to 45,000 in 2008 from 12,000 accounts in 2003, according to the latest data from the Office of Community Services, the agency within the U.S. Department of Health and Human Services that administers the IDA program. It's estimated that about a quarter of the accountholders nationwide were saving up to invest in small businesses at the end of 2008, up from 19% in 2004.
The economic downturn, however, has made it more difficult for some organizations to collect the private funds they need to match federal funds, which have remained steady at about $24 million a year between 2008 and 2010. Still, many grantees have continued to find funding and are now opening new accounts at the same pace they did before the recession, if not more. Funding shortages at Earn, a nonprofit in San Francisco that offers asset-building services in the Bay Area, has limited them to 315 accounts in 2008, less than half of the 635 accounts opened in 2007. But the group rebounded last year, opening 611 accounts.
Because participants are required to write a business plan, IDAs help many people formalize small businesses they may have started without long-term goals and direction, says Earn president Ben Mangan. The group has helped 327 IDA savers invest $1.7 million in small businesses since 2002. "You have a lot of micro-enterprises that are being launched in people's homes that really comprise the second or third jobs for some of these business owners," says Mr. Mangan.