The Wall Street Journal
By: Jonelle Marte
June 1, 2010
At a time when many people short on income are calling on their inner entrepreneurs, some start-ups are finding relief in a little-known resource--individual development accounts.
These accounts, which have grown in popularity since their inception more than 10 years ago, 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.
While IDAs are most popular with aspiring homeowners, program coordinators say they're seeing aspiring entrepreneurs - some of whom have lost jobs or taken big pay cuts - use the accounts to start enterprises with low upfront costs, such as catering, cleaning, landscaping and children's day-care businesses.
Jenny Robinson was initially hoping to save up for a home in 2006 when she opened her individual development account at New Visions, New Ventures, a nonprofit community economic development organization in Richmond, Va. But after getting laid off from her job as an office-furniture salesperson in June 2008, her priorities changed. 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.
She bought a new stove, convection microwave, mixers and a dishwasher -- upgrades that allowed her to boost production to about 20 cakes a week from five. She took cake-decorating classes and stocked up on supplies and baking ingredients. She says the improvements came as she was struggling to meet rising demand.
"You can't tell people no," says Ms. Robinson, who now sells cakes to eight restaurants and a farmer's market and is earning half of what she was making as a salesperson, not including the boost she has seen during wedding season. "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 Individual Development Account 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, Calif., 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 for the disabled 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, logo design, business cards, laptop and printer, as well as to launch a website, victorycoaching.net.
How Do I Qualify for an IDA?
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 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 she received as part of the program have helped her understand how creditors are interpreting her finances. And 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.
Ms. Smith says she is slowly growing her business to the point where she can cut back hours at her part-time job, leading group exercise classes at the local YMCA, to one day a week.
In general, the total number of IDAs tripled to 44,000 in 2007 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. About 25% of roughly 45,000 accountholders nationwide were saving up to invest in small businesses at the end of 2008, up from 19% in 2004.
Andrea Levere, president of the Corporation for Enterprise Development, a Washington, D.C., nonprofit that works with low-income communities, says she expects that percentage to increase, especially as people who are laid off try self-employment.
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. For instance, the New Hampshire Community Loan Fund, which administers the statewide IDA program, has had to eat into loan profits and potential grant money to cover part of the $200,000 in operational deficits over the past two years.
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 forced Earn, a nonprofit in San Francisco that offers asset-building services in the Bay Area, to open 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 in mind, says Earn president Ben Mangan. The group has helped 327 IDA savers invest $1.7 million in small businesses since 2002, more than participants saving for education or to buy a home.
"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.