Microloans May Be a Sweet Territory for Credit Unions
There are members who want to strike out on their own but just need a little start-up capital to get a small lawn care business going or market an electrical repair shop.
To make those entrepreneurial dreams a reality, some credit unions are approving the tiniest of loans. Microloans are gaining ground within the industry as some banks shun them for their perceived lack of revenue. Yet, for many, it remains untapped territory.
“The problem is that traditional bank models overlook the low-to-moderate income consumers, and they lack cooperation,” said Scott Butterfield, principal of Your CU Partner, a Seattle strategic planning firm. “It's ironic considering that credit unions, founded on cooperative principles, are considered the first microenterprise institution in the world with more than 150 years of history.”
Butterfield said the difference between a microenterprise business and a small business is defined by the number of employees or the amount of capital needed. Microenterprise small businesses have five or fewer employees and have capital requirements less than $35,000. Small businesses on the other hand have between six and 500 employees and capital needs greater than $35,000.
As an advocate of microenterprise development, Butterfield said he is pleased with how the industry is willing to fund microbusinesses. Credit unions are successfully receiving and leveraging sizable grant funds to support loan loss reserves, capital and operation expenses to support their microenterprise programs, he noted. In 2011, The National Federation of Community Development Credit Unions reported that credit unions received $28 million during the current year to support microenterprise development and other community development programs.
One of those is the $14 million Kingsville Community Federal Credit Union. During his 13-year tenure, President/CEO Armando Martinez said the Kingsville, Texas-based cooperative has always funded the smaller loans but on the consumer lending side.
For 2011, nearly $50,000 has gone to budding business owners who needed funds to buy a truck to install signs, a home remodeling contractor and the purchase of computers and software upgrade packages needed by a self-employed attorney, among others.
The loans have ranged from $1,000 to $35,000. He said losses very seldom occur. In fact, for 2011, the credit union is set to chargeoff $23,000 for all loans, considered small by some standards. Martinez said Kingsville Community FCU gets collateral to secure the microloans.
“What we’re finding is while commercial banks are wanting a large requirement of items that borrowers need to present, some of these small mom and pop [shops] barely have a bookkeeper,” Martinez said. “They’re so grateful that they want to comply because they want to survive.”
Martinez said there is certainly a need in Kingsville, a community 35 miles southwest of Corpus Christi, Texas. There are 13 financial institutions here serving a population of roughly 35,000, he pointed out. While loan demand has shrunk because of the economy, the area’s banks are still watching their competitors closely. Martinez said when a local bank found out that the credit union was offering the microloans, it started taking steps to create its own program.
Kingsville Community FCU is poised to have more of a presence as it nears the final stage of completing a community development financial institution grant that would bring in secondary capital in reserves and additional funds to set up a business lending program. The credit union would also hire an experienced business lender.
“That’s the whole effort. We are a low-income community and we need to find solutions for them,” Martinez said. “We need to be a point of reference.”
The credit union has several alliances to help with its mission of creating more business owners including with the SBA, Texas A&M University’s College of Business, Hispanic Chamber of Commerce and the Kingsville Chamber of Commerce. All have been instrumental in coordinating and incubating once the businesses have been defined.
“The important thing is over the course of time, you communicate to the membership and community that we’re here to help,” Martinez said. “When you do that, it pays dividends, and delinquencies are controllable. We may hit 2% with [return on assets] because of the work we’ve done.”
Butterfield agreed that the outcomes are positive. He cited a 2002-2007 microenterprise client study that showed 88% of those who started a business were still operating five years later. Fifty-four percent reported an increase in median revenues from approximately $52,000 to just over $82,000 during the period tracked. Seventy-eight percent of microentrepreneurs surveyed were operating a business at least one year after receiving services from a microenterprise program.
"Microenterprise small businesses are perfect for credit unions since they typically need less complicated financial products and assistance," Butterfield said.