How Individual Development Accounts Can Help to Open and Grow Small Businesses
One tool that women and minority businesses can use to raise money for starting their company is an IDA – Individual Development Account. The program is a “matched” savings account in which the funds can be used to pay for for expenses such as education, buying a home, or starting a business.
Launching a small business is a proven method of escaping poverty and providing both a stable income for a family while delivering needed jobs and services to local communities. In fact, immigrants, women, as well as minorities (including black and Hispanic people) are more likely to start a company than “white males”. Obtaining the needed financial backing to start a business is often a major hurdle particularly for low-income entrepreneurs. Opening an Individual Development Account (IDA) is one proven method to accumulate the necessary funds.
IDAs are savings accounts in which a person’s monetary deposits into a bank or credit union are matched by a sponsoring partner. Matching funds are provided by a variety of sources including local, state and federal governments, corporations, churches, charities, tribal or non-profit organizations, individuals and businesses. Often times minority or women focused non-profits offer them too, such as the United Way or Urban League.
Depending on the IDA sponsor, matching funds for starting a business or paying for startup costs may run anywhere from a ratio of 1:1 up to 6:1. In general, shorter programs tend to have higher match ratios. Also Black, Veteran, or other disadvantaged startups may get higher matching amounts as well.
Each program determines how accumulated IDA funds can be used. The most common uses are for education, purchasing a home and starting or expanding a small business. Some programs may specify that funds can only be used for a single purpose such as a business startup. This is the version which can most help women, veterans, and minorities. When an IDA account is opened, the participant selects a goal for use of the funds. Before funds can be used, the sponsoring agency must approve.
Starting or expanding a small business are consistently among the top reasons given for opening an IDA. National research indicates IDA participants are 84% more likely to own a business. IDA funds are typically used to purchase assets for a business or to pay for start up costs. An aspiring female, veteran, or minority entrepreneur might open an IDA to cover costs for the purchase of equipment and supplies, a computer or a company vehicle. However, other business needs may also qualify including website design, joining a business association, working capital or attending tradeshows.
Eligibility and Requirements for women and minority IDA programs
With a broad variety of organizations providing matching funds, eligibility requirements and program specifics differ widely. However, most have some general characteristics.
IDAs are designed to help low-income entrepreneurs who have few assets. Some IDAs focus on helping Latino, Black, Asian, or females who are seeking to start a company. Individual program requirements vary, but almost all have income and asset limits. Household net income must usually be less than 200% of the federal poverty level or 65%-80% of the area median income. Some programs also base eligibility on an applicant’s property such as homes, cars and savings and may require that assets total less than $5,000 to open an IDA. Poor credit history or excessive debt may disqualify a person from opening an account.
Program participants are expected to regularly deposit funds into the account, often monthly. Deposits might be as low as $20. Participation is usually required for a minimum of six months and may also have a maximum limit of up to five years. Some programs cap annual or lifetime matches.
Funds deposited by program participants must be from earned income such as a paycheck. However, earned income generally also includes unemployment, welfare, disability and Social Security income or income from a small business. Gift income does not qualify.
All IDA programs require the account holder to participate in financial education classes, which can also be an entrepreneurship class too. When the goal involves starting a business, classes may focus on developing business plans, management skills or marketing. Other classes may teach specific financial skills such as money management and debt reduction. Persons considering opening an IDA should carefully review program requirements to be sure they are willing to comply.
Examples of IDA Programs
There are more than 600 IDA programs across the country. They are all open to people of any race, religion, age or ethnicity – however most will be sure to allocate some of their services for women, veterans, and minorities who need assistance starting a company. The following are a few examples.
In Oregon, many community action agencies sponsor IDAs for persons living on or near Indian Reservations. This means disadvantaged Native Americans, or people that live near them, can get help. In general, participants must have a net household net worth of less than $20,000, be at least 12 years old and contribute to the account for a minimum of 6 months. Community Action agencies will match funds at a 5:1 ratio, so if the participant deposits $100, WSCAT will add $500 more up to a maximum of $3000 per year.
Mercy Corps sponsors another IDA program specifically designed to help launch and expand small businesses for women as well as minority groups. All participants have a savings goal of $1000. If the goal is met, the participant leaves the program with $6,000 that can be used for business needs or to help pay startup costs. The minimum participation time is 13 months. Clients using the program have included contractors, food cart operators, lawn-care technicians, and janitorial service entrepreneurs. Read more on Mercy Corps IDA.
In Mississippi, the Community Action Agencies operate an IDA program that provides $2 for every $1 deposited toward the goal of opening or expanding a small business, with a focus on lower income disadvantaged groups (Black, Latino, LGBTQ, women, etc.). Participants have a deposit limit of $1,000 and must contribute no less than $20 per month for at least six months but may stay in the program for up to three years.
As noted, there are hundreds of other Individual Development Account Programs (IDAs), many that focus on minorities, women, or veterans who are seeking to start a business or who may be entrepreneurs. The few above are just examples. They can be a key source of funds or capital for disadvantaged as well as low income families who want to start a business.
Applying for Individual Development Account start up funds
Studies indicate that persons who opened IDA accounts often continued to save on their own after leaving the programs. Since the IDA concept was launched in the 1990s, tens of thousands of low-income entrepreneurs have been able to start a business. Many of them have been immigrants, minorities, or lower income females even including single moms.
Women and minorities have been able to turn their business dreams into reality and increase their standard of living. Anyone considering the IDA option as a vehicle to fund small business needs can easily find a list of programs through an online search. A great place to learn about, and apply for an IDA, is the United Way 211.
There are other places for female or minorities (including single mothers or low income households) to learn about the Individual Development Account Programs. One of the most common non-profits that offer this matched savings account for entrepreneurs are Community Action Agencies. Another option will be wealth development – IDA programs for minorities and inner city residents from the Urban League.
By Jon McNamara