A credit union helped a small-time baker growfrom delivering home-baked goods to parties and weddings to placingBundt cakes on regional grocery store chain shelves with amicroloan of less than $50,000.

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That's what the $156 million JetStream Federal Credit Union inMiami Lakes, Fla., did when it approved a $15,000 loan to help abusiness member manage cash flow as he waited for payments fromclients, said Jeanne Kucey, president/CEO.

The member already had a line of credit with the credit unionand was recently approved to additionally finance a delivery vanand more equipment. The baker is also in the process of hiring moreemployees to provide cakes for distribution at the Lakeland,Fla.-based Publix Supermarkets Inc., which has nearly 1,100 storesin Alabama, Florida, Georgia, North Carolina, South Carolina andTennessee.

“Our business lending program really took off, but we found thatwe weren't meeting the needs of some of our smaller businessmembers,” Kucey said.

The Filene Research Institute in Madison, Wis., recentlyreleased a new report that explores the benefits and risks ofmicroloans. Microloan Feasibility Study: Can Small BusinessLending Become Big Business for Credit Unions?, was written byDave Grace, managing partner of consulting firm Dave Grace &Associates and former senior vice president of the World Council of Credit Unions.

In addition to discussing market conditions, the Filene reportalso studied borrower demand and said microloans and credit unionsmight be well-suited for one another.

Along with JetStream, the $52 million The Queen's Federal CreditUnion and the $27 million Aloha Federal Credit Union, both based in Honolulu, wereprofiled in the report.

“Most credit unions are struggling to get any loans in the door.I would call them near crisis level,” Grace said. “And, the smallera credit union is, the less lending it's doing on average. So, theneed for new products is out there. Micro businesses are lookingfor loans.”

The industry hit a historic low in June 2012 when U.S. creditunions' loan-to-asset ratio tumbled to 58%, the lowest mark in 18years, Filene said. The problem was further compounded by near-zerorates on liquid investments, the firm noted.

Although micro business loans are exempt from the memberbusiness lending cap, Grace said they are still a relatively smallslice of the loan portfolio pie. At the end of 2011, only 9.7% ofall credit unions offered micro loans, the report said, citing CUNAdata. Since September 2009, the number of credit unions offeringthe loans grew a modest 4.4% to 681 credit unions in 2012. However,only one-third of all credit unions that offer member businessloans also offer micro business loans.

Next Page: A Ripe Market

The market is certainly ripe. Businesses with fewer than fouremployees made up 88% of all business in the U.S. in 2008, thelatest period tracked by the U.S. Census. They employed 28.6million people, or roughly 25% of all employees in the country.

Before making an entry into micro business lending, Gracesuggested credit unions build their loan loss reserve funds andforge partnerships with providers of business development andtechnical services in order to ensure the success of the borrowers.Developing special underwriting criteria and training lender arealso key elements.

JetStream recognized there was an untapped niche within itsmembership, which has a strong immigrant population, said GuyPetroro, senior vice president of lending at JetStream.

More than 85% of the members consider English to be their secondlanguage, Kucey said, and the credit union has a branch in SanJuan, Puerto Rico.

One of the key elements to bridging the language gap has beenLeo Navarro, assistant vice president of business services, who isbilingual. Navarro walks members who were intimidated by the bankenvironment through the loan process.

JetStream provides resources to help members prepare theirbusiness plans, too.

The credit union also noticed it wasn't easily providing loansin the $20,000 to $30,000 range, Kucey said.

JetStream currently has a little more than $3 million inbusiness loans on the books, with an additional $6 million in theworks and $1 million in micro business loans, Petroro said.

“A lot of them are in the process of expanding and haveexperience in the line of work they're in,” Petroro said. “We liketo see a business in operation for three to five years.”

With all the potential benefits of micro business loans, Graceacknowledged that credit unions should expect higher losses on themthan on many of their traditional products.

To manage risk, credit unions could price high enough tocompensate for risk, start borrowers on short loan cycles, beginwith smaller loan amounts, collect on loans as soon as they go badand have payment schedules that reflect cash flow cycles, thereport said.

Another action item before launching a micro business loanprogram is a thorough assessment of the market and competitors,said Angel Garcia, business development specialist at the $35million Lower East Side People's Federal Credit Union in New York.

He said credit unions should avoid areas already saturated withlarge, well-known national chains, and make sure new businesses aregrowing in the market.