Micro Loans Take Off Through Collaborative Mentorship
Among the 20-plus organizations served by Choices Federal Credit Union is a group of small business development centers.
The seven-year-old cooperative in St. Louis with $437,000 in assets and a little over 400 members still felt that it could meet a growing need for those graduating from those SBDCs that, despite completing a 10-week intensive small business curriculum and putting together a business plan, were being turned down for the smallest amounts of start-up capital.
“After they’re done, they’re dead in the water because they can’t get funding,” said Phil Minden, chairman of Choices Federal.
For more than a year, the credit union worked with one of its member organizations to put together a microenterprise program but struggled to get it off the ground, Minden said. A local, private foundation expressed interest in helping out but wasn’t keen on the money being used for just loan funds, he added.
One of Choices Federal’s board members, who used to work for the Missouri Credit Union Association, suggested reaching out to some of the CEOs of larger credit unions for a possible collaboration. Enter Patrick Adams, the president/CEO of the $211 million St. Louis Community Credit Union. Minden said Adams was sold on the idea of helping Choices with its microenterprise loan program.
By late November, the idea started to take shape. In January, the two credit unions announced a new effort that would provide micro loans to borrowers. St. Louis Community agreed to purchase a 90% participation in each loan closed under the program. Choices Federal would have the remaining 10% and could now offer loans under $7,500 to assist aspiring entrepreneurs and small business owners to finance the start-up or expand existing firms. St. Louis Community can approve loans up to $35,000.
The credit union also received a $15,000 grant from the St. Cronan Housing Corp. The additional monies allow the credit union to close up to $100,000 in microenterprise loans. Minden said $5,000 will go to equity to add to Choices Federal’s books and $10,000 is earmarked for loan loss reserve. The plan is to offer loans for the next two years, expand its portfolio to $250,000, and then move forward independently.
To be eligible for the micro loans, applicants must complete accredited small business coursework at a SBDC.
“They have 10-week classes with 40 people in them. People graduate from the program and get loans to start their business,” Minden said. “One of [the graduates] came to us about a year ago needing help.”
Both Choices Federal and St. Louis Community are community development credit unions and community development financial institutions and are familiar with the funding application process to assist underserved and low income areas, said Kirk Mills, executive vice president and chief financial officer at St. Louis Community.
“The need is great,” Mills said. “The more we can collaborate, the more we can leverage and bring more to the market. It was a natural fit.”
St. Louis started a similar micro loan program about two years ago, Mills said. With a few loans on the books, the effort is still growing, he pointed out.
Minden is convinced that his credit union's effort could not have gone forward without assistance from St. Louis Community.
“The collaboration is an excellent example of how larger, more established credit unions can work with small, emerging credit unions to expand their product base and grow their balance sheet,” Minden said.
As for worries about any potential defaulted loans, everyone agrees that it was a consideration from the start.
“That was one of our major concerns because we’re so small,” Minden said. “We really wanted to be cautious. For us, these are more of a character loan versus a business loan.”
Minden said the funds allocated for loan losses and a loan participation arrangement with St. Louis Community offers relief and, hopefully, assures the regulators.
Mills reiterated taking a cautious approach but said losses were cut across all loan programs.
“We’re taking those risks in things like auto lending too,” he explained. “The people who go through the program have a business plan, a counselor works with them and they’ve been vetted.”
While there may be some trepidation from smaller credit unions working with their larger counterparts, collaboration can still make a difference.
“Credit unions were built on the spirit of cooperation,” said Mike O’Brien, senior vice president and chief marketing officer at St. Louis Community. “In this day and age, you see less of that because so many credit unions are competing against each other and merging. Philosophically, we think [micro loan collaboration] is the right thing to do.”