Stressed out by her corporate job and looking for a release, Sabrina Jones started dabbling in homemade, chemical-free skin care products in 2015.
A lifelong eczema sufferer, she primarily sought relief from her own symptoms. But as friends and family found out, they started asking for some of her products. Pretty soon she had a business.
“I was invited to participate in a market,” said Jones. “I wanted to make sure I was doing it the right way, especially if there was going to be someone that’s going to buy it. So that’s when I looked into registering. I wanted to have legitimacy.”
So, register it she did and, through a collaboration of the West Broadway Business and Area Coalition and the Northside Economic Opportunity Network, she participated in the Northside Holiday Boutique.
“It was very successful,” said Jones, owner of S & J Creations, LLC, which does business as SJC Body Love. “We were one of the top-selling new businesses.”
Opportunities to grow
In the years since, her model has changed a bit. She set up a website so repeat customers could more easily find her products. She opened a retail store downtown with several other concepts. And, then, when the pandemic hit, she closed that and got into the wholesale business. Her products are available through several stores.
She has been gaining momentum, but had no money to expand and no business background.
“I didn’t know anything about cash flow,” Jones said. “I’m like, ‘This is all new to me. I don’t know what I’m supposed to be expecting. I don’t know what I’m supposed to be forecasting.’”
Enter the ConnectUP! Institute, a social finance and enterprise development organization that provides education, consulting and collaboration for entrepreneurs from underrepresented communities.
The organization also offers character-based financing to companies that don’t have established credit or collateral to get traditional loans from banks.
Jones met Elaine Rasmussen, founder of ConnectUP, and began attending classes and networking events.
“Elaine and her team were really able to sit down and look at my growth, look at my cash flow, look at my books and really estimate and forecast what I would need to set my (key performance indicators),” said Jones.
Through ConnectUP, Jones received a $30,000 loan and a $10,000 grant.
The concept, Rasmussen says, is educating business owners who don’t have traditional backgrounds so when they need the next round of financing for growth, they’ve got the credit history and financial acumen to do so the traditional way.
Rasmussen started ConnectUP upon realizing the state had plenty of resources for start-up companies and for those looking for six-figure-and-up investments, but not a lot for early-stage looking for smaller amounts to establish themselves. That leaves out a lot of people of color, rural-based businesses and other underserved segments.
“I started asking people ‘Is this a problem for you?’” she said, adding that it’s really a return to the days when credit was based on relationships more than collateral.
But make no mistake about it. While ConnectUP acknowledges there is risk in offering character-based loans, Rasmussen says the organization makes recipients earn it.
Businesses must be at least three years old and must be 51% owned by either a person of color or based in a rural community. Business owners must still go through a due diligence process that includes several classes instructing them on topics like cash flow, preparation of financial statements.
“It’s a true test,” she said, adding that if business owners don’t have the mindset and gumption to complete the 90-day process, they don’t get the funding. “They have to go through this process before we even consider offering them capital.”
Upon completion, ConnectUP provides six months of fractional executive support from experts who help entrepreneurs make sound business decisions to help them grow.
“You are coming out with an organizational budget, you are coming out understanding your cost of goods sold,” Rasmussen said. “I can’t tell you how many entrepreneurs have no idea how much it costs to do the thing that they do.”
Character-based lending is largely a specialty of Community Development Financial Institutions (CDFI) that are specifically created to invest federal dollars alongside private sector capital to assist with generating economic growth in distressed communities across the country.
Not all CDFIs offer character-based loans. Another that does is the St. Paul-based community nonprofit Neighborhood Development Center (NDC). That organization still looks at credit scores and other information when considering loans, but not to the level a bank would. There is still an underwriting process.
Most of the recipients are start-ups, though the organization does provide on occasion larger loans. If someone requests $250,000 or more, NDC taps into the experience of several bankers and entrepreneurs on its loan committee. But regardless of amount, the goal remains assisting business owners who otherwise might not get an opportunity.
“You’ve got to remember, the entrepreneurs we support are the low to lowest income, so they don’t typically have a lot of collateral,” said Renay Dossman, NDC president and CEO.
NDC also offers technical assistance to recipients through a 12-week training program and has a low rate of defaults, around 2%.
“You learn how to write a business plan,” she said. “We help you with all other aspects of your business. We deal with people that just need the opportunity. They don’t have the access to capital.”
Not a typical bank product
While character is one of the factors banks consider, it’s not likely to see many getting into the market of loaning money based entirely or nearly entirely on character. That’s because banks are regulated differently than CDFI organizations, said Jim Amundson, president and CEO at BankIn Minnesota.
“If regulators came in and examined a bank and a bank was doing significant amounts of solely character lending, there would likely be some real issues for that organization,” he said. “I don’t want to come off as if banks, especially community banks, don’t consider character, because they do in every decision. But they can’t make loans solely based on character.”
Rasmussen agrees it might be an area traditional banks may want to avoid.
“I highly discourage big banks from getting into this,” she said. “It is not in alignment with their business model.”
While she’s had some challenges along the way, Jones has been gaining momentum. She’s hired four part-time staff members and she’s preparing in 2024 to leave her other job in order to focus solely on growing her own business.
Meanwhile, Jones has paid back nearly half her $30,000 loan and she’s starting to put together the paperwork necessary to approach community banks for her next round of financing. She likes that the money she has repaid on her loan can now go back into ConnectUP’s fund and be used to help other business owners grow.
“Being able to do that and get acclimated to that whole world, I really appreciate that piece of it,” she said. “It’s kind of that paying forward piece.”
That’s exactly as it’s supposed to work, according to Rasmussen. The organization wants to help as many business owners as possible get opportunities they might otherwise have been denied.
“We want our capital to be catalytic,” Rasmussen said. “We want our capital to be the training wheels for bigger capital.”