Micro-enterprise Loan Fund Model oals of Micro-enterprise Programs

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1 Class 14: Micro-enterprise Loan Funds Micro-enterprise Loan Fund Model New model that has mushroomed over past ten years with foundation and federal government support Serves start-up businesses and small businesses with one (selfemployment) to five employees Combines training and technical assistance with lending Targets populations historically denied access to credit and TA, including low income people, minorities & women Provides small loans: usually $500 -$10,000, but may be as high as $25,000 Staff intensive programs actively involved with assisting entrepreneurs through technical assistance and/or training Goals of Micro-enterprise Programs Human development: fostering self-esteem and personal skills of the target population Poverty alleviation through self-employment and business ownership Small business creation and growth to generate income and jobs for a community. Access to credit and business development services for historically undeserved groups Expand community business and leadership skills

2 Three Micro-enterprise Program Models Peer Group Lending Model Adapted from successful experience in developing countries: Grameen Bank, ACCION International Borrowers operate in a group context with credit decisions made by the peer group Peer group provides support and problem solving role as well as making credit decisions and collecting payments Loans are staged with short repayment periods and "graduation" to larger loans once earlier loans are repaid. Peer group guarantees the loans of all members. New loans are not extended until the group repays all prior loans Mechanism to serve small, start-up businesses that lack collateral and need very small amounts of capital Advantages of Peer Group Approach Capacity to serve many people Lower administrative costs Mutual support and dependence improves loan repayment Accessibility to inexperienced and low-income participants Disadvantages of Peer Group Approach Greater complexity and longer time frame to set up groups Some entrepreneurs may not want to work in a group Group dynamics or one failure may hold back the group Long time period needed to secure a substantial loan

3 Individual Lending Model Technical assistance and lending provided to individual entrepreneurs Loan approval through "traditional" process Primary emphasis on lending with less attention to training and human development Provides larger loan amounts ($5,000 - $25,000) with longer terms (1-5 years) Serves both start-up and existing businesses Advantages of Individual Lending Model Simpler to establish and serve businesses Technical assistance and credit tailored to individual firm needs Can scale-up and expand lending more readily Able to serve faster growing firms that need larger loans Disadvantages of Individual Lending Model More staff intensive to administer Lacks the support, networking and problem solving mechanism of peer groups Requires more capital

4 Training Led Model Focuses on business knowledge and skills as key factor for business success rather than credit Business plan development as focal point for training Credit is an optional, not defining element, of the program. Business can access informal credit sources, defer start up or not establish a business. Advantages of Training Led Model Addresses business skill and capacity issues in low-income communities May set the foundation for more successful businesses when credit is extended Does not require funding and staffing for lending component Disadvantages of Training Led Model Higher staff costs due to intensive training Does not address access to credit obstacle Lack credit incentive to attract & motivate entrepreneurs Core Models can be adapted and combined to meet local needs and reflect varied goals: Institute for Social and Economic Development (ISED) training programs combined with helping entrepreneurs access existing private financing (including guarantees) Portable Practical Education Program (PPEP) - organizes associations among existing firms and delivers technical assistance and financing through these associations

5 Microenterprise Programs Operating Challenges and Issues Choosing the best model and services for target market(s) Peer group versus individualized lending Loan sizes, lending process and lending criteria Type and level of technical assistance and training Managing multiple programs serving diverse groups Reaching and involving historically isolated groups Extensive outreach needed with use of enterprise agents Use of existing social, community, and business networks Fit of program model is critical Managing the lending and servicing process Handling a large volume of small loans Creating lending policies and processes that support new entrepreneurs and new businesses while making sound loans Sufficient focus on collections & early attention to problems Reaching scale to be sustainable and achieve impacts with high operating costs Lending is a far greater challenge than raising capital. Aspen Study Funds averaged $1.1 million in total capital (with 6 under $1 mm) --much less than other finance programs. Loan portfolios were even smaller, averaging $354,000 with only 40% of capital in loans. Staff intensive nature of program yields high costs. Aspen Study Funds had annual program costs of $100 -$500K. Average cost of $1.47 per $1 loaned. Revenues covered only 5 to 25% of costs (operations, interest and loan losses)

6 Delivering the Range of Training and Technical Assistance Services Needed: Self-esteem and basic skill building Pre-start-up training in business planning and management On-going specialized skills training On-going technical assistance & problem solving Training peer groups to fulfill their credit and collection roles Trend among programs toward increased services, especially on-going training modules and technical assistance Securing and Retaining staff with appropriate skills: Organizing and coaching skills, especially for peer group programs Small business development and finance skills Loan monitoring and servicing capacity Multi-lingual and multi-cultural Building Relationships with conventional lenders As Funding Sources (Loan Capital And Subsidies) To Lend To "Graduates" Of Program For Pro Bono loan review and technical assistance services

7 Lawrence Working Capital Case Study ( , over 6 years, Lawrence WC formed 53 groups serving 344 business owners resulting in 793 loans totaling $964,000 in loans). Represents 60% of WC lending in Massachusetts! Average loan of $1, How did the program get established in Lawrence? What contributed to its success in recruiting and involving many entrepreneurs? a. role of Minority Business Council and WC's benefits b.leadership of 3 enterprise agents Leonora Sanchez, Mildred Rodriguez, Rosa Orellanan c. existing close-knit relationships within Dominican population in Lawrence and existing business activity d. cultural acceptance/experience with informal credit 2. What type of businesses participated in the program? Cathy Mahon: a. Very small, one or less full time employees b. mostly existing entrepreneurs rather than new start-ups c. Largely retail (42%) and service (25%) d. Income supplement, growth-oriented, & established. Lisa Sevron: 16% start-ups, 41% said their WC businesses was their first business, 90% of participants are Dominican, 70% women, 58% have annual income of $15,000 or less (below poverty) 3. What impacts did the Working Capital program have on these businesses and the community? Sevron: On businesses, average increase in sales of 60%,

8 ($551 per month before WC to $670/month after. Profits grew by 56% on average. Owners draw increased 17% from $441 per month to $457 per month. Other impacts: increase in owner s confidence/self-esteem, increased community involvement Mahon: a. community: helped strengthen MBC, fostered positive image of Hispanic community, helped expand goods & services for community b. businesses: TA and change in entrepreneurs' attitude, strengthened and institutionalized existing informal networks, helped build new relationships c. economic development: limited job creation and limited internal and external market development to fuel growth 4. Do you see potential for longer term impacts from the WC program and the Hispanic business activity in Lawrence?

9 Good Faith Fund Started in 1988 as part of the Southern Development Bank, an Arkansas off-shoot of South Shore Bank 1. What were the initial obstacles in getting the GFF off the ground? 1.Lack of understanding, cultural differences between the Fund and its potential customers. 2.Inability of people to form their own groups and difficulty of groups staying together 3.Limited loan volumes: around 20 per year in early years 4.High default rates and fraud among participants. 2. What were the early changes that GFF made to its program based on its early problems? Requiring credit checks & collateral, establishing a 6-week training course, disbursed loan proceeds directly to vendors, reduced loan sizes. Eliminated group repayment and collections requirements. 3. What reasons does Taub offer for the difficulty of transferring the Grameen Bank model to rural Arkansas? Low population density, out-migration, and small & lowincome markets Markets and competition are statewide, national and international for rural Arkansas. Barriers and cost of entry in business are much higher. Problems in forming groups

10 4. What type of businesses did the GFF support? Largely service businesses, supplemental income activities for families, people with a safety net who could take the risk of starting a business 5. What is Richard Taub s view of GFF s impact and economic development potential? Mostly service businesses formed, impact largely on the quality of life for low and moderate-income people. Not really economic development or poverty alleviation. 6. What does the Lawrence and Good Faith Fund experience suggest about the impact of micro-enterprise programs? 7. What are the lessons on success factors & best practices for microenterprise development programs from these two cases?

11 Microenterprise Program Trends From Aspen Study Increased diversity in programs offered and tailoring of programs to needs of different client groups Expansion of clients served => development of new products and services Tightened up lending programs, policies and systems to improve quality of loans and reduce delinquencies Expanded focus on training and technical assistance: 1. initial business training prior to receiving credit 2. on-going technical assistance to address business issues 3. specialized training modules, one-on-one assistance, peer group 4. special needs for peer-lending: group members capacity to evaluate/decide on loans to group members and their role in advising other groups members Trends in Credit-Led Programs 1. shift to in-house servicing 2. increased information and analysis in loan underwriting 3. more staff, vs. committee, involvement in loan decisions Trends in Peer-Lending Programs 1. increased staff role in training and TA 2. larger and more flexible group sizes to address drop-outs 3. formal staff role in review and approval of loans 4. tighter policy and procedures to reduce delinquencies 5. expansion of credit and repayment guarantee mechanisms beyond the peer group pressure

12 Trends in Training-led Models 1. specialized training efforts for welfare recipients 2. Post-training support groups and networks Difference in US context 1. lack of prior business experience when entering program 2. greater diversity of background and experience among participants 3. more complexity and competition faced by businesses Aspen Study Trends: (1) more fine-tuning and increased variety of program offerings (2) tightening of policies to reduce delinquencies and losses (3) increased focus on training and TA Individual lending: more in-house servicing, more thorough underwriting increased staff role in loan decisions Peer Group: increased training & TA to borrowers and groups, more flexibility in group size, more staff role in loan decisions, stronger collection policies, stronger incentives for repayment

13 MATRIX OF PROGRAM MODELS Program Models 1. Revolving Loan Funds 2. Loan Guarantee Programs 3. Venture Capital Funds 4. Royalty Investment Funds 5. Small Business Investment Corporation 6. Community Development Bank\Bank Holding Company 7. Community Development Loan Fund 8. Community Development Credit Union 9. Microenterprise loan fund Considerations 1. Economic Development Goals Served 2. Type of business\project served 3. Type of financing 4. Start up requirements: regulatory 5. Capitalization required: start-up/stablized operations 6. Access to capital 7. Operating requirements 8. Major restrictions\limitations