Commenter's Corner: Andrew on Starbucks and small-biz credit

This is in the comments on my Starbucks post, but I think Andrew S. offers some good and interesting commentary that I want to highlight:

It really doesn't reduce new and small businesses to charity cases. It treats CDFIs--and the services they provide in the form of technical assistance and low-cost credit--as charity cases which almost all of them have always been. That's the innovation. I think this effort does a good service by recognizing that not all sources of credit are the same and that getting a loan as a small business is not merely a matter of declaring your interest in getting one. If you have a sexy internet company with high growth potential, money can be easy to come by. If you want to start a lawncare business, not so much. The "technical assistance" part of the picture is important as well. There are lots of people with great ideas for starting their own businesses who don't really know how to use debt effectively. Coupling loans with that kind of education has proven extremely effective in the CDFI community. Kickstarter is great for some things, but it has high labor costs and it's an all-or-nothing payoff which is a terrible structure for a long term sustainable business to work with. Anyway, recognizing that the market has failed small business borrowers is a good thing, and recognizing that lenders who serve those borrowers will need subsidies to do so is also a good thing.

Starbucks becomes a microlender? (Or: Capitalism becomes a charity case)

Joe Nocera highlights Starbucks' new effort in the NYT:

Here’s the idea they came up with: Americans themselves would start lending to small businesses, with Starbucks serving as the middleman. Starbucks would find financial institutions willing to loan to small businesses. Starbucks customers would be able to donate money to the effort when they bought their coffee. Those who gave $5 or more would get a red-white-and-blue wristband, which Schultz labeled “Indivisible.” “We are hoping it will bring back pride in the American dream,” he says. The tag line will read: “Americans Helping Americans.”

It didn’t take long for Starbucks to find the perfect financial partner: Community Development Financial Institutions, or CDFIs. These are lenders, mostly under the radar, that specialize in underserved communities. Most, but not all, CDFIs are nonprofit, and their loan default rates are extremely low. “We specialize in expending credit, getting paid back, and paying back our investors,” says Mark Pinsky, whose organization, Opportunity Finance Network, acts as an umbrella group to the best of them.

It seems to me this is a variation on microlending, usually a developing-world phenomenon to help the poor develop their own businesses. It could be effective. But I'm worried about one thing: Starbucks' effort reduces new and small businesses, essentially, to charity cases.

And maybe that's the way it has to be in 2011 America. But—since I'm not a socialist, and want to actually see markets made to work for the maximum public good—I'd rather see Starbucks put its muscle behind a Kickstarter-style operation that lets entrepreneurs raise capital by going directly to the customers for their products. That lets businesses that have an actual market for their ideas rise to the top rather quickly, instead of going through a bureaucracy—even a well-intentioned one—that'll have more of a hit-miss rate. And Kickstarter-type operations strengthen capitalism by providing investors with a return on investment—even if that return is simply the product being manufactured—instead of the warm glow of nebulously "saving American jobs."

I'm grateful that Starbucks CEO Howard Schulz is thinking about this kind of stuff. But Starbucks didn't start out as a charity case; it created a product that people liked, and became fabulously successful doing so. For the next generation of businesses to succeed and provide jobs, they'll have to do the same thing. In this case, maybe it's better that we ask Americans to be investors instead of donors.