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Cash for Change

Jaime Verab sees potential in every water fixture.

“People don’t know they have all these options,” says Verab, “so I ask every new client, ‘What do you want to see? What do you want to hear?’”

The options vary widely. From gurgling pond to rushing brook to manmade waterfall, Aquatic Artisans, Verab’s waterscape business, will build you just about anything you can imagine. This kind of customer service is key to an independent business like Verab’s. As he tells his clients, “I can’t compete with other people’s prices, but they can’t compete with my attention and quality.”

But over the past few years, Verab’s orders have been on the decline. After countless trade shows and several free displays failed to improve business, he began to look for other options. When a friend told him about a program at Yale called Elmseed, he was intrigued. Now, Verab has staked his entrepreneurial hopes on a project run by college undergraduates.

Elmseed, a nonprofit microcredit group that provides independent entrepreneurs like Verab with small loans and business training, is operated entirely by Yale students. Elmseed grants loans without performing any credit check or asking for any collateral, relying instead on a social incentive for timely repayment. Clients, who are formed into groups of three to five members, can only take out a new loan if the rest of their group is up-to-date on its payments. With each successful repayment, the loans increase in size, doubling successively from $1,500 to a max of $12,000 each time a client repays a loan.

The effect is twofold. By granting loans without background checks, Elmseed allows those who might be overlooked by regular banks to have access to capital. By using a group model, Elmseed simultaneously establishes a community of business peers and ensures that, despite its clients’ lack of credit rating, its loans get repaid without resorting to hostile creditors or legal action.

Elmseed is not alone in this endeavor. Its business plan is based on Muhammad Yunus’s Grameen Bank, which was originally established in 1976 in Bangladesh but was not thrust into the spotlight until 2006, when Yunus won the Nobel Peace Prize for his work. Elmseed is one of a growing cohort of microcredit groups that has cropped up across the globe in the last fifteen years, most of which aim to implement variations of Yunus’s model—not just in the developing world, but in the United States as well.

The concept is an innovative reworking of the American Dream with the modest goal of ending poverty, one hardworking entrepreneur at a time. By giving the working poor a helping hand rather than a hand-out, microfinance offers an ideological truce. As James Choy ’03, one of Elmseed’s founders, says, “Liberals love it because it provides resources to the desperately poor that wouldn’t otherwise have access to them. Conservatives love it because it gives people the chance to end their own poverty through capitalism and hard work.”

It is almost impossible, however, for a microcredit agency to break even, let alone make money, in industrialized nations. In developing countries, microcredit usually turns a profit, despite the high amount of labor required to produce multiple small-scale loans. Microcredit groups in the developing world maintain low operating costs and high interest rates, which can range from 10 percent in Asia to almost 150 percent in parts of Africa. In the United States, however, operating costs are high and federal regulations limit interest rates, making microfinance less practical.

Elmseed has found a way to work around these obstacles. In translating domestic microfinance to a college system, Elmseed cut operating costs by substituting student volunteers for paid labor.  “We wouldn’t be able to support the twenty staff members that we have if we paid them,” says senior Cynthia Okechukwu, Elmseed’s director of development. Using unpaid students, she explains, allows Elmseed to “have as much human capital as possible.”

Elmseed is hoping its model will stick. After a solid six years in New Haven, Elmseed has already inspired a similar program at Harvard, the Cambridge Microfinance Initiative, which began about a year ago. Elmseed is currently in consultation with Rutgers, Georgetown, and Trinity, hoping to spread its gospel even further.

It all started six years ago in a late night dorm room bull session between then-sophomore Choy and his roommate Gabriel Kuris. Spurred by Choy’s internship with Project Enterprise, a microcredit firm that operates out of New York City, the two were discussing why microcredit doesn’t work in the United States. “James was saying that the problem is in Bangledesh you can hire really qualified grad students for two hundred dollars a month, but in America labor is expensive,” says Kuris. “One way to do it in America is to use college students who could do everything for free.” They partnered with classmates Kitty Harvey and Nowshad Rizwanullah, and over a series of dinner meetings and late nights, the four sophomores drew up a business plan for Choy’s brain-child.

The Elmseed Enterprise Fund launched after winning the Yale Entrepreneurial Society’s Y50K competition in 2001. Their proposal, created entirely by undergrads, beat out many proposed by groups of graduate students and even faculty. Through the Y50K seed money, and a partnership with Citizens Bank, the students were left with their dream, a business plan, and, according to Choy, “more money than we knew what to do with.”

The original Y50K check still hangs mounted on the wall of the Elmseed office, along with computer print-outs of inspirational quotes and a broken clock. Though the office is small, its corporate setting in a Church Street office building is a far cry from the church basements and free community spaces in which Elmseed originally met. Not only necessary but strategic, the office lends a note of professionalism to this corps of college students. Elmseed staff members always wear business attire to meetings, and they emphasize preparation and punctuality. “We’re a professional business,” says Elmseed CEO Ka Mo Lau ’09. “When you’re dealing with someone’s finances, apologies don’t matter.”

By creating a professional business, Elmseed has also created a selective one. With a 30 percent acceptance rate of applicants for staff positions, it’s harder to receive a place on the small staff than it is to receive a loan. Students are expected to have equal parts professional know-how and community compassion. “One of the questions we always ask in our interview is ‘What would you spend $1,500 on?’” says Lau. “I mean, that’s so small, a lot of us spent more than that on books freshman year. It’s important to be aware of these things.”

Although staff members sacrifice many aspects of college life to run a business, they still struggle to measure up to full-time workers. Elmseed staffers work long, unpaid hours and are expected to maintain professionalism regardless of midterms and problem sets. Every summer, a senior officer forgoes lucrative internships in consulting and finance to stay behind in the office. “We aren’t a full time staff that works 24/7, but our clients expect that kind of service,” says Lau. “Their businesses aren’t seasonal; we can’t take spring break off.”

For sophomore Dana Wu, Elmseed’s director of public relations, this professionalism takes a heavy toll. “Over the summer, when I was on the West Coast, a client would call me at seven a.m. East Coast time,” says Wu. “Even at four a.m. my time, I would take the calls.” But Elmseed’s cadre of students simply cannot provide this sort of continuous, dedicated service every hour of every day. This past summer, one of Verab’s group members wanted to pay back his loan but was unable to get in touch with the Elmseed staff. There were no center meetings and phone calls went unreturned. Verab expressed his annoyance: “If they’re going to be a professional organization, you have to know how to return a phone call, every time.”

Claudia Kay deals in daffodils and chrysanthemums, but her wares are of the plastic variety. “I started working with fresh flowers, but I found I could do more with synthetic,” says Kay. She has yet to take out a loan, but she credits Elmseed with bringing her out of retirement and offering her a chance to turn her knack for crafts, jewelry, and flower arrangements into a second career. “It gets you doing something,” says Kay.  “More than the money, Elmseed keeps you motivated.”

Kay found Elmseed’s members refreshingly engaged. At a series of center meetings, which several groups attend every other week, she presented her business plans and received presentations from the Elmseed staff on topics ranging from risk management to pricing models. “The students are smart, and there’s always something to learn,” says Kay. Even more valuable than her interactions with the Elmseed staff have been her interactions with fellow entrepreneurs. “Some of the other clients are very experienced,” says Kay. “They’ve given me some great ideas for my business.”

Darryl Minchenko, another Elmseed client, takes a less relaxed approach to entrepreneurialism than Kay. Minchenko lives and breathes business. His website includes streaming homemade videos marketing a golf/ring-toss fusion that Minchenko calls “Soft-Toss.” Techno music blares, a camera flashes, and the scene pans to Minchenko, clad in a button-down shirt and his signature Yankees cap, promoting Soft-Toss at the IGA Inventors Expo. Children putt, laughing and pressing their arms in the air. A man swerves his face toward the camera. “I’m taking a bunch of these home!” In the end, all Minchenko took home from the expo was a silver medal. “No one bought my product,” he says. “They bought into it, but no one bought it.”

So when Elmseed walked through the door of Smooth’s, a barbershop which Minchenko currently runs, he was intrigued. “They were talking about giving money away,” he says. “Whether it’s from a kid or an adult, money’s money.” However, like Kay, Minchenko has yet to take out a loan. He spends his time focusing on his business plan rather than financing new initiatives. Still, Minchenko finds Elmseed’s connections and networking opportunities particularly helpful. “You never know who’s in the room, or who these kids are gonna know,” he says.

In ten years, Minchenko hopes to be giving seminars and motivational speeches and marketing his business plan. He wants to be as successful as Tim Washington, an Elmseed legend, cited in its business proposal as an example of how to capitalize on a small sum of money. But Washington’s initial capital was not a loan, but a lottery win. He cashed in a two thousand dollar lottery ticket in the late ’80s and used the money to buy a hot dog cart. The one cart soon multiplied into ten, which became a fleet of ice cream carts during a particularly hot summer. He has now transformed his lotto luck into property investments worth, he estimates, between seven and eight million dollars. “I’ve always known how to make money,” says Washington. “I know how to turn a dollar into five, but accounting—that’s where Elmseed helps me out.” Though he took out only a single loan from Elmseed, mostly as a favor to the fledgling organization (he bought some soda with it, he recalls), Washington continues to attend center meetings. “They’re sort of a guide for me,” says Washington. “You’re always going to learn something every time you go there.”

But the assistance that microcredit offers can only help those, like Washington, who are ready to take it. B.J. Hartman, one of Elmseed’s first clients, seemed an ideal beneficiary of microcredit efforts. Born into poverty and missing both arms, Hartman was a hot-dog vendor who wanted to take out a loan to start a business selling winter clothes on the New Haven Green. He was frozen out in a few months. “Other folks were selling things that were cheaper than what I’m selling,” says Hartman. “It was like going into the lion’s den.”

After some financial difficulties and personal crises, Hartman defaulted on his loan. His team members paid it back through combined fundraising efforts, but Hartman is no longer involved with Elmseed. Currently working in customer service, Hartman misses the freedom of being self-employed, but he doesn’t miss the challenges of running a small business. “Most people say it’s like baby steps, but I noticed being a small business you get stepped on easily.”

Dean Karlan, an assistant professor of economics at Yale who specializes in microcredit, believes that stories like these—more than the challenges of interest rates and operating costs—explain the mixed record of microcredit in America. “One of the biggest challenges domestic microcredit faces is that most small enterprises in America fail,” says Karlan. “In developing countries there’s a flourishing sector that is huge, but you don’t see much of that in America. It’s less obvious the types of things that an unemployed person with a five hundred dollar loan can do.” Because of this difficult market, successfully starting a business requires unique initiative, something that few possess.

Clayton Williams, a senior loan officer with New Haven’s Small Business Initiative, which provides small entrepreneurs with business training and slightly larger loans than Elmseed’s, tries to make sure that his clients are prepared to run a small business. “I always ask new clients, ‘Are you the kind of person who doesn’t mind working 18-20 hours a day? Or do you need eight to ten hours of sleep and want to take a vacation every year?’ If you’re the former then maybe you can start a business, and if you’re the latter you should probably get a job,” says Williams.

Elmseed’s founders were disillusioned by the difficulties of creating successful businesses from scratch. “I think in the beginning we imagined that we’d just put up signs saying ‘Microloans’ and people would come,” says Kuris. Instead, recruiting was difficult; most of the group’s initial clients were brought in with Washington’s help, and many of the original loan recipients were unprepared to start a business. A jazz musician defaulted on the money he had borrowed to cut his demo tape.  A woman who had hoped to start a promising business selling supplies for the deaf lacked the contacts to form a group and, as no pre-existing groups had space, was unable even to join the program. “A lot of people took their kindness for weakness,” Washington says of the Elmseed staff. “Because they’re young and from Yale, people think you’ve got a lot of money.”

It was a short but difficult time, Kuris believes, before the staff began to understand the complexity of poverty. “After the first year we were really humbled, both by the initiative of our staff, and the difficulties of the issue at hand,” he says. “It was a steep learning curve.”

Jeremy Kahan ’04, a former CEO of Elmseed who currently sits on its board, reiterates the delicate balance between business and philanthropy. “You’re lending to people who have a very fragile economic situation,” says Kahan. “These are real-life people with real-life situations. You know what, it’s really hard to collect your $1,500 when someone doesn’t have enough money to pay for their dialysis.” Despite these issues, the repayment rate that first year was over 90 percent and is now an impressive 94 percent.

Though this statistic sounds promising, it doesn’t necessarily indicate Elmseed’s success in getting small businesses off the ground with micro-loans. Victor Wong ’09, CFO of Elmseed, declined to provide the number of successful businesses created through Elmseed funding. Alumni estimate ten businesses have prospered. Lau believes that Elmseed’s success should be measured in its repayment rates, its business successes, and its personal successes. “One of our clients is a clown, and he employs half a dozen people,” says Lau. “It’s making change on a small scale, and seeing it spread.”

But for some clients, this scale is too small. Despite the twenty-thousand dollars of loans Elmseed is currently circulating amongst its clients, Verab has yet to take out a threshold loan of $1,500. “I look at Elmseed as brainstorming,” Verab explains. “Maybe 1 percent of all businesses can do something with a loan of $1,500. For my business, for an established business, that kind of money is nothing. Yeah, you can buy a hot dog cart, but to rent a facility, to buy equipment, it’s just not going to work.”

As a student organization, however, Elmseed’s success should be measured not only in terms of its clients, but in terms of its staff. After ditching problem sets for center meetings and summer parties for four a.m. phone calls with clients, the students who work for Elmseed come to identify with the singular devotion and sacrifice necessary to operate a small business. Kahan is fully aware of Elmseed’s role in shaping students’ futures. “We’ve created several independent businesses, and besides that we’re getting ten kids who are doing something very concrete, meaningful, and important,” he explains. “People who graduate from Elmseed go on to become great civil leaders.”

Choy emphasizes that the concept of microcredit is still in a trial phase. “The jury is still out on microcredit in general,” he says. “Even Grameen, which has been around for thirty years now—there are still lots of debates about whether that’s a good idea now.”

Elmseed’s staff members remain convinced. “Elmseed doesn’t make claims to change the world,” says Wu. “We’re not going to change New Haven in a year. But I know Elmseed has made a difference in individual’s lives.”

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