Micro Lending Challenges
As some credit unions continue to be the lifeline for microenterprises seeking out loans for less than $2,500, a number of challenges to meet their needs may still exist.
The typical credit choices from micro businesses range from personal loans from family and friends and credit cards to payday loans, according to a July eScan from CUNA.
Among the potential obstacles lenders face are recovering costs. On the supply side, it’s difficult to price small-dollar loans, CUNA said.
Lenders entering the market express a desire to provide safe, affordable loans, but they also must charge an interest rate that allows them to recover the high costs of offering the loans, the eScan analysis showed.
Underwriting polices may be another concern because as micro lenders have traditionally relied on relationship-based underwriting, they might be reluctant to switch to methods that would allow them to scale up. That would require more transaction-based underwriting, using credit scorecards and other qualitative factors.
The microenterprise industry is also constrained by a lack of data, according to eScan. Many lenders don’t have robust cost accounting systems or adequate information to make pricing decisions, and more research is needed on the effects on borrowers and the overall economy.
Ultimately, some borrowers might still prefer the convenience and immediacy of credit cards or payday loans to microloans, which often require training or financial education, or have other transaction expenses.
CUNA said raising the member business lending cap, especially in the aftermath of the financial crisis and a reduction in the availability of business credit, would certainly aid microenterprises.
The NCUA recently enacted a program that makes more than 1,000 credit unions eligible for a low-income designation, which would also allow them to make unlimited MBLs.