Microloans Can Boost Loan Production Without Threatening Cap: Filene
A credit union helped a small-time baker grow from delivering home-baked goods to parties and weddings to placing Bundt cakes on regional grocery store chain shelves with a microloan of less than $50,000.
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That’s what the $156 million JetStream Federal Credit Union in Miami Lakes, Fla., did when it approved a $15,000 loan to help a business member manage cash flow as he waited for payments from clients, said Jeanne Kucey, president/CEO.
The member already had a line of credit with the credit union and was recently approved to additionally finance a delivery van and more equipment. The baker is also in the process of hiring more employees to provide cakes for distribution at the Lakeland, Fla.-based Publix Supermarkets Inc., which has nearly 1,100 stores in Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee.
“Our business lending program really took off, but we found that we weren’t meeting the needs of some of our smaller business members,” Kucey said.
The Filene Research Institute in Madison, Wis., recently released a new report that explores the benefits and risks of microloans. Microloan Feasibility Study: Can Small Business Lending Become Big Business for Credit Unions?, was written by Dave 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 report also studied borrower demand and said microloans and credit unions might be well-suited for one another.
Along with JetStream, the $52 million The Queen’s Federal Credit Union and the $27 million Aloha Federal Credit Union, both based in Honolulu, were profiled 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 smaller a credit union is, the less lending it’s doing on average. So, the need for new products is out there. Micro businesses are looking for loans.”
The industry hit a historic low in June 2012 when U.S. credit unions’ loan-to-asset ratio tumbled to 58%, the lowest mark in 18 years, Filene said. The problem was further compounded by near-zero rates on liquid investments, the firm noted.
Although micro business loans are exempt from the member business lending cap, Grace said they are still a relatively small slice of the loan portfolio pie. At the end of 2011, only 9.7% of all credit unions offered micro loans, the report said, citing CUNA data. Since September 2009, the number of credit unions offering the loans grew a modest 4.4% to 681 credit unions in 2012. However, only one-third of all credit unions that offer member business loans also offer micro business loans.
Next Page: A Ripe Market
The market is certainly ripe. Businesses with fewer than four employees made up 88% of all business in the U.S. in 2008, the latest period tracked by the U.S. Census. They employed 28.6 million people, or roughly 25% of all employees in the country.
Before making an entry into micro business lending, Grace suggested credit unions build their loan loss reserve funds and forge partnerships with providers of business development and technical services in order to ensure the success of the borrowers. Developing special underwriting criteria and training lender are also key elements.
JetStream recognized there was an untapped niche within its membership, which has a strong immigrant population, said Guy Petroro, senior vice president of lending at JetStream.
More than 85% of the members consider English to be their second language, Kucey said, and the credit union has a branch in San Juan, Puerto Rico.
One of the key elements to bridging the language gap has been Leo Navarro, assistant vice president of business services, who is bilingual. Navarro walks members who were intimidated by the bank environment through the loan process.
JetStream provides resources to help members prepare their business plans, too.
The credit union also noticed it wasn’t easily providing loans in the $20,000 to $30,000 range, Kucey said.
JetStream currently has a little more than $3 million in business loans on the books, with an additional $6 million in the works and $1 million in micro business loans, Petroro said.
“A lot of them are in the process of expanding and have experience in the line of work they’re in,” Petroro said. “We like to see a business in operation for three to five years.”
With all the potential benefits of micro business loans, Grace acknowledged that credit unions should expect higher losses on them than on many of their traditional products.
To manage risk, credit unions could price high enough to compensate for risk, start borrowers on short loan cycles, begin with smaller loan amounts, collect on loans as soon as they go bad and have payment schedules that reflect cash flow cycles, the report said.
Another action item before launching a micro business loan program is a thorough assessment of the market and competitors, said Angel Garcia, business development specialist at the $35 million Lower East Side People's Federal Credit Union in New York.
He said credit unions should avoid areas already saturated with large, well-known national chains, and make sure new businesses are growing in the market.