Turning equity into opportunity: Montana fund helps Native entrepreneurs enter the financial mainstream

Photo Gallery: Meet the Montana Indian Equity Fund Clients Profiled in this Article

For the last several decades, efforts to develop the economies of Indian Country communities have focused heavily on businesses owned by tribal governments.^1/ The range of tribal enterprises is diverse and includes gaming operations, natural resource development, tourism, and retail establishments. Some tribes have experienced significant economic gains from these enterprises, as measured by the steady improvement over the last 30 years in inflation-adjusted per capita income for Native Americans residing on Indian reservations. While this growth has been significant, it is unequally distributed. Data show that in 2000, per capita income for Native Americans residing on Indian reservations was less than half the national average, and Indian Country as a whole remains in poverty.^2/

More recently, there has been increased attention paid to entrepreneurship and private business as important contributors to sustainable economic development in Indian Country. Some tribes and Indian organizations are recognizing the need to support small business growth in their communities and have developed revolving loan funds, technical assistance, training, or other programs to support business owners and entrepreneurs.^3/ Similarly, Indian Business Alliances have been established in Montana, South Dakota, and Wisconsin as a grassroots approach to support private sector growth in Indian communities. (For more on the Indian Business Alliances, see the sidebar below.)

A commonly cited barrier to the development of private markets in Indian communities is the lack of access to affordable credit and capital. Efforts to address these financing issues are varied. For many years, they focused on lending sources, such as federal loan guarantee programs, community development financial institutions, and micro- and revolving loan funds. Recently, efforts have broadened to include asset development programs, such as earned income tax credits and individual development accounts (IDA). However, asset development programs have not generated enough funds to overcome one important barrier to business development in Indian Country: a severe shortage of equity—that is, the entrepreneur's ownership interest in a business venture, provided in the form of cash or other assets.

According to Tanya Fiddler, executive director of Four Bands Community Fund on the Cheyenne River Sioux Reservation in South Dakota, "While efforts such as IDA programs are an important and positive piece of the equity puzzle, they don't have the capacity to meet the need for bigger deals."

Fortunately for some Indian Country communities, there is a new funding program designed to address the equity shortage. The Montana Indian Equity Fund (Equity Fund) was implemented in 2007 by the Montana Department of Commerce, with support from the Montana State Tribal Economic Development Commission and the Montana Governor's Office of Economic Development. The Equity Fund is a pilot initiative to determine whether and how small contributions of equity might assist American Indian entrepreneurs in accessing commercial loans or other financial resources. In its first year of operation, the Equity Fund's ten clients collectively leveraged $63,000 of equity into more than $550,000 in loans and collateral. Those results demand a close look at the Equity Fund's origins and design. They also suggest that the program could provide a model for business development policy in Indian Country.

Three questions

Outside of Indian Country, sources of equity commonly used for starting and expanding small businesses include home equity, inheritance, and funding from friends and relatives. Within Indian Country, these sources are scarce. According to Pamela Standing, executive director of the Minnesota American Indian Chamber of Commerce, "The lack of equity is the single biggest barrier to the creation of Indian businesses."

Statements like that prompted the entrepreneur development program manager for the Montana Department of Commerce Small Business Development Center to work with the Montana Governor's Office, the Montana State Tribal Economic Development Commission, First Interstate BancSystem, and other members of the Montana Indian Business Alliance in considering whether providing grants of equity to Indian entrepreneurs could stimulate private development on Montana's Indian reservations.

The program manager considered three key questions at the outset.

First, Why is the private business sector underdeveloped in Indian Country? The program manager concluded that the answer lies in 150 years of history. Prior to the mid-1800s, the Indians of the American West were highly engaged in trade through vast intertribal networks that often included European and American traders. In the latter half of the nineteenth century, as a result of the westward expansion of white settlement and the development of federal policies that removed Indians to reservations, these networks ceased to exist. Reservation communities were virtually isolated from external commercial activity, with the exception of minimal business dealings in the reservation border towns. In the absence of trading networks and traditional means of livelihood, an alternative economic model developed. Reservation communities became dependent on the federal government for their survival. While the economies of adjacent non-Native communities continued to develop through trade and other commercial activity, the entrepreneurial culture that once defined many tribes largely faded away.

An informal model of government dependency persists, affecting development efforts in much of Indian Country. Today, most Indian Country economic development strategies focus on businesses owned and managed by tribal governments. Even in communities where successful, tribally owned enterprises are found, there is often little business diversity because private sectors are typically underdeveloped. And, for the most part, the limited private sector activity that does exist within Indian reservations remains outside mainstream financial markets.

Second, How do business owners outside Indian Country access sources of financing? In non-Native communities, the commercial banking system is the predominant source of business development finance. The equity of the entrepreneur or business owner enables access to this source of financing. It is the borrower's "skin in the game" that commercial lenders require to mitigate risk. Through the use of equity and the commercial loan capital it generates, a business owner can be truly entrepreneurial and actively move his or her business forward. This commercial financing activity is what drives business development in market economies.

Third, Given the scarcity of equity sources for Indian entrepreneurs, would an injection of equity help make a deal happen in Indian Country, as it does for business owners elsewhere? To answer this question, the Montana Department of Commerce was willing to create a pilot program to see what effect small grants of equity might have.

Mirroring the commercial loan process

The Equity Fund's developers based the program on a straightforward premise: The scarcity of equity available to Native American business owners is a significant barrier to business development in Indian Country; therefore, providing equity should assist in opening up financial markets to the Indian entrepreneur. Accordingly, the Equity Fund's developers took a straightforward approach in designing the program's features.

The Equity Fund was developed to closely parallel a commercial loan process, as opposed to a grant program or other special funding program. For example, the Equity Fund application was based on a typical commercial bank's loan application. This proved to be an important component of the Equity Fund's success, as it aligned the thinking of both the equity applicants and the Equity Fund's review committee members with commercial financing practices. And, as in commercial lending, the equity applications were not competitive; instead, they were reviewed on a first-come, first-served basis. There was only one requirement attached to the awarding of an equity grant. Each recipient had to provide a dollar-for-dollar match for the grant, in the form of collateral or loans. Recipients could leverage their equity grants to acquire loans from lenders of their choice.

The equity application review was developed as a two-part, two-committee process. The first, or local, committee consisted of a commercial bank loan officer,^4/ a person of good standing from the applicant's community, and a representative from a local development corporation. The local committee provided a recommendation to the second review group, which included staff from the Montana Department of Commerce and the Montana Governor's Office of Economic Development. Final approval was reserved for the director of the Montana Department of Commerce.

To manage an applicant's risk, the Equity Fund's developers applied the same criteria and quality assurance measures as in a typical commercial loan. For example, in order to keep the application process in line with commercial financing practices, they chose not to attach special prerequisites to the grants. As a means of managing risk, lending programs offered by nonprofit organizations often make applicants complete special requirements, such as training or technical assistance, before they provide loans. Since special prerequisites are not usually required for a commercial loan, the Equity Fund's developers omitted them from the application process.

The Equity Fund veered away from a commercial lending model in one important respect. In a typical commercial bank's loan application risk assessment, credit history is a major factor. However, because having a poor credit history or no credit history at all is common among the American Indian population, often due to limited or no banking experience, the credit review is frequently a deal-killer for business loans in Indian Country. Recognizing this, the Equity Fund criteria allowed credit reviews, but for informational purposes only. Instead of using the credit review as the basis for approving or denying an application, the local review committee evaluated each applicant in the way a traditional, small town banker might evaluate a potential borrower, by asking "Is he or she good for it?" The committee relied on the character endorsement from the member of the applicant's community in this component of the review.

Success stories

The ten recipients of the Equity Fund's first-year allocations included several Indian artists, a small engineering consulting firm, a home care assistance provider, a beauty salon, an educational consultant, a silkscreening business, and a home remodeling and renovation company. They represented six of Montana's seven reservations, as well as the Little Shell Tribe of Chippewa Indians of Montana—a landless tribe headquartered in Great Falls. The equity grants the entrepreneurs received ranged from $3,375 to $7,875. To illustrate how the recipients used their grants, three of their stories are highlighted below.

• April Custer owns Care and Comfort Home, a home care service for medical patients. Her business is located in the town of Havre, which is adjacent to the Rocky Boys Reservation in north central Montana. Custer received an equity grant of $7,875 to hire a part-time bookkeeper so she could expand her services. Upon further discussion with the local review committee, Custer decided instead to purchase and renovate a building. She leveraged her equity with $150,000 in loans from a local commercial bank and $49,918 in community development block grant funds, for a total match of $199,918. Custer moved the business into her new facility in February 2008. She is now planning to further expand the business to serve additional clients, "as soon as I can find more money."

• Curtis and Jenny Trinder own Trinder Enterprises, a remodeling business on the Fort Peck Reservation in northeastern Montana. The Trinders received an equity grant of $4,375 to purchase appliances and a cabinet display. The immediate growth in sales they realized as a result of the expansion encouraged them to seek a $225,000 loan from a local development corporation for the purchase of a building and inventory, including cabinets, appliances, flooring, paint, wall coverings, and window treatments. The business is now a full-service home renovation center.

  "The equity grant really helped us see that expanding our business in this direction was a good move," says Curtis Trinder.

• Rae Ann Cline owns The Mane Event, a beauty salon in the town of Browning on the Blackfeet Reservation in northern Montana. Cline received $7,875 for equipment, inventory, and cash flow. As the deal moved forward, however, Cline expanded her business plans to include a space for a coffee and gift shop. Using her equity grant, she established a relationship with a commercial bank and received a loan for $21,000 to fund the expansion. According to Cline, the business expansion has made her salon "a place where my customers can truly relax."

Moving into the mainstream

These three Equity Fund recipients turned their aggregate $20,125 in equity grants into $445,018 in loans. Collectively, the ten Equity Fund recipients matched $63,000 with $550,603 in loans and collateral. An impressive result, but the Equity Fund's success at attracting resources and empowering entrepreneurs can be measured even more broadly. Grants from the Equity Fund enabled these Indian business owners to move into the mainstream of business finance, build relationships of trust with commercial lenders, and enter what the Peruvian economist Hernando de Soto calls the "bell jar," or mainstream, of commercial activity.^5/

Significantly, the positive developments have not all been business-related. Several of the Equity Fund recipients have become much more involved in their communities. Cline has become active in the Browning Chamber of Commerce as a business mentor, Curtis Trinder is now mentoring youth entrepreneurs, and Custer is serving on community health boards.

Dr. Johnel Barcus, executive director of the Browning Community Development Corporation on the Blackfeet Reservation in Montana, is encouraged by the Equity Fund's impact in her community.

"Until recently, the possibility of owning a business has been a mere pipe dream for our tribal members. With the creation of the Equity Fund and seeing what it enabled Rae Ann to do with her salon here in Browning, other potential business owners in my community now know that they, too, can achieve their dreams. This fund is very significant for us."

Shannon Augare, a Native American Montana legislator who serves as director of public policy and community relations at Rural Dynamics Incorporated, is encouraged as well.

"The Equity Fund offers an invaluable service by providing equity to entrepreneurs from Indian Country who would otherwise not have access to such funds," says Augare. "This program proves that by giving these entrepreneurs a chance, they will not only succeed, but will also bring a sense of pride and accomplishment back to their communities."

The Equity Fund's success may have implications for Indian Country policy development. It demonstrates that policymakers should consider directing funds for Indian business development toward sources that will put equity into the pockets of the wealth creator—the entrepreneur—and enable him or her to access conventional sources of business financing.

Soon, more Indian entrepreneurs in Montana will have an opportunity to benefit from this new, equity-focused approach to business development. The Montana Department of Commerce funded the equity project again for 2008 and is open to receiving additional funding from other sources. Anthony Preite, director of the Department of Commerce, sees promise in the Equity Fund's initial success.

"The hope is that by enabling Indian business owners to enter the mainstream of commercial finance, there will be a ripple effect that will lead to a wave of entrepreneurial development and growth."

Shawn Real Bird, who serves as chair of the Montana State Tribal Economic Development Commission and economic development director for the Crow Nation, concurs, adding, "Without the development of a private sector in Indian Country, our only alternative is to continue in poverty."

Access to affordable financing is essential to the development of private businesses. Maybe the simple provision of equity to Indian business owners can help make it happen.

Philip Belangie is the Montana Department of Commerce Small Business Development Center entrepreneur development program manager. He can be reached at 406-721-3663 or pbelangie@mt.gov.

Photo Gallery: Meet the Montana Indian Equity Fund Clients Profiled in this Article

1/ Kate Spilde Contreras, Ph.D., Business Development in Indian Country, prepared for the National Congress of American Indians Policy Research Center (NCAIPRC), May 2007, p. 3.

2/ Stephen Cornell and Miriam Jorgensen, The Nature and Components of Economic Development in Indian Country, prepared for the NCAIPRC, May 2007, pp. 7–8.

3/ Examples of these programs include the Entrepreneurial Center at Sitting Bull College on the Standing Rock Sioux Reservation, the Mille Lacs Band of Ojibwe's Small Business Development Program, and the Browning Community Development Corporation's "Indianpreneurship"™ business training workshops.

4/ Loan officers from First Interstate Bank, Bear Paw Development Corporation, and Great Northern Development Corporation volunteered for this role in the pilot program.

5/ Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, 2000, Basic Books, New York City, p. 66.