MADISON, Wis. (9/12/13)--Many credit unions want to enter or expand business lending, and one opportunity to do so is through offering microloans, according to a new Filene Research Institute study.
"Microloan Feasibility Study: Can Small Business Lending Become Big Business For Credit Unions?" by Dave Grace, managing partner, Dave Grace & Associates, indicates that market conditions, borrower demand and lending characteristics suggest that microloans and credit unions may be a good match.
The implication for credit unions is that microloans are exempt from credit unions' regulatory cap on business loans, and credit unions can develop win-win relationships with microborrowers.
"Microlending can be profitable, but like most new business lines it will take adjustments and understanding of the market to succeed," Grace said.
Microloans are small-business loans for up to $50,000. Micro loans are generally used for start-up cash but are sometimes given to newly launched small businesses for working capital.
To prepare for microlending, credit unions should partner with small-business development centers, other microlenders, the Small Business Administration or business chambers to drive loan demand.
The report said credit unions also should consider:
Building loan-loss reserve funds;
Forging partnerships with providers of business development and technical services to better ensure borrowers' success;
Developing special underwriting criteria and training lenders;
Implementing proactive loan referral efforts; and
Offering other businesses services--checking and credit card accounts, tax preparation--to generate new revenue streams.
Lessons from international microlending can help credit unions mitigate the higher risks of microloans, compared with traditional loan products.
Lessons learned include:
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.
Have payment schedules that reflect cash-flow cycles.
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