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CU System
Filene Study: Use Microloans To Boost Biz Lending
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.
For more information, use the link.
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