FROM THE
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More Microlenders, More Credit: Leveraging an Online Loan Platform
So Small Lenders Can Reach More Underserved Entrepreneurs
M
icrolenders provide small loans to business owners who
cannot obtain traditional bank financing, and today, demand
for this financing exceeds supply. It is estimated that 17,623
microloans were made in 2010, against an estimated market of potential
of 10 million individuals.1 In order to meet this large, currently
underserved market, the microlending industry must change the way
it operates in order to reach more borrowers. As with any industry,
economies of scale make it such that small lenders spend more per loan
to lend than larger lenders. Minimizing the cost to make a loan should
enable lenders to lend more money to more small businesses, but small
loan funds struggle to do this alone.
A multitude of very small volume lenders are scattered throughout
California, and many of them are members of California’s Association
for Micro Enterprise Opportunity (CAMEO),2 the state’s member
association for microenterprise-serving organizations. Each of those
community lenders may have a small loan fund or may have just
received loan capital to begin lending; some have no current funds at
all. CAMEO seeks to improve small lenders’ efficiency and help them
grow their loan volume by aggregating underwriting activity across
the state. To make this happen, CAMEO will begin processing loans
through Accion Texas’ Microloan Management System (MMS). As
a result, small lenders in CAMEO’s network will get access to a fast
preapproval process, standardized lending guidelines and outsourced
underwriting, which enable them to focus on finding more businesses
in need of loans and offering more services in their local communities.
HOW DOES IT WORK?
THE PROBLEM
Many underserved entrepreneurs have a hard time
accessing traditional business credit, so they turn
to microlenders, but the microlending field is not
yet capable of meeting the overwhelming demand
for their products. Small loan funds and community
banks pay too much per loan to manage a small
portfolio, which makes it hard for them to serve
more borrowers.
AN INNOVATIVE SOLUTION
CAMEO is helping their member organizations
minimize costs and ultimately increase loan volume
by providing improved underwriting and lending
efficiency through loan aggregation and an online
microloan management system.
This brief is designed to present a problem
facing low- and moderate-income microbusinesses;
share a set of solutions being implemented
by an innovative service provider; and explore
the market and policy barriers and
opportunities that affect the scalability of that
approach.
As a state-wide association of microenterprise organizations, CAMEO
has recruited four seasoned and sophisticated member organizations
to take part in the initial pilot. CAMEO’s access to MMS is critical to the success of this pilot. MMS provides microlenders
with:
• An online application.
• An automated prescreen based on stated revenue and expenses, the credit report and a statistical analysis of past
borrower repayment data.
• Standardized risk assessment applied to all loans.
1
FIELD at The Aspen Institute, “2011 Microenterprise Census Highlights: FY 2010 Data,” March 2012. Available online at http://fieldus.org/Publications/
FY2010CensusHighlightsNEW.pdf.
2
Visit CAMEO online at http://www.microbiz.org/.
1
APPROVED
Figure1. Potential Loan Application Process
Entrepreneur
Fills out
Online Loan
Application
APPLICATION
MMS Requests
APPROVED
Supporting
Documentation
Needed from
Business Owner
Accion Texas
Underwrites
the Loan &
Recommends
Approval or Denial
Lender
Makes Final
Decision
MMS provides an
instant Auto Review
Lender Pulls
Credit Report &
Runs Application
through MMS
DENIED
DENIED*
*Applications denied at this stage may still move to underwriting if the borrower can resolve the issues that led to denial
WHAT’S SO INNOVATIVE ABOUT THIS APPROACH?
Aggregating loan volume across California’s microenterprise development organizations will help lower the operational
cost per loan, enhance overall efficiency and increase loan volume. At the end of the day, this approach could position
California’s smallest microlenders to fill a credit gap for thousands more small and microbusinesses across the state.
Here’s how:
• MMS integrates standardization into the microlending process. Microloans at small lenders are usually
underwritten on a case-by-case basis over a period of several months. Through MMS, the emphasis is on cash flow
and a standardized risk matrix that recommends whether or not a loan can be made and the maximum loan amount.
The lender maintains the ability to override MMS’s recommendation and make loans at their discretion. Standardized
underwriting criteria represent a departure from how small nonprofit microlenders typically operate, with characterbased lending decisions based on the good judgement of loan officers and the loan committee.
• Lenders will reduce the time they spend on high-risk applicants by learning the risk level of the application at the
start of the application process.
• CAMEO provides participating microlenders critical training and technical assistance on how to streamline the
loan process to make best use of MMS.
HOW IS THIS SYSTEM IMPROVING ENTREPRENEURS’ OUTCOMES?
• Lenders will make more microloans. Organizations using MMS tend to substantially increase their loan volume
and number of small businesses served in the first two years of use. By lowering the cost to make a microloan and
decreasing the time to process the loan, CAMEO’s participating microlenders should free up staff time and loan
capital, enabling them to address the vast unmet need for affordable financing.
• Loan applicants will receive quicker responses from lenders. The faster a small business can receive a microloan,
the less likely they are to turn to alternative financing at much higher interest rates, such as a payday (online or retail)
or title loans. Microloan interest rates range from 5-18%, compared with much higher rates for credit cards and shortterm loans. Reducing the time and hassle in getting a microloan makes this financing option more useful to busy
business owners.
• Repayment rates may also increase. Switching from manual to automated underwriting can improve a microlender’s
repayment rates. When this is the case, lenders’ portfolios become more self-sustaining, enabling them to lend more
over time.
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POTENTIAL BARRIERS AND OPPORTUNITIES TO SCALE
This system is designed explicitly to expand a delivery mechanism for getting financing in the hands of entrepreneurs; it’s
all about scale. However, many of the systems and structures required to make this innovation a success are unprepared
to handle such a new platform.
• Barrier 1: It’s not easy to make the changes to organizational culture, both at CAMEO and among lenders, necessary to make
this approach work. Successful adoption of the MMS platform requires more than just learning new software. CAMEO
needed to first learn how MMS works from a practical and underwriting standpoint, then teach its members and
facilitate their switch to the automated system. CAMEO must play the role not just of state microlending association,
but also act as an organizational change consultant in guiding its members to take up MMS. These changes require
buy-in, personal commitment and availability from each organization’s leadership to be successful.
• Barrier 2: Credit bureaus are not set up to facilitate loan aggregation among microlenders. Credit bureaus are vigilant about
ensuring that organizations pulling credit reports are using the sensitive data in an acceptable way, such as in order to
make a loan decision. CAMEO hired a lawyer to help it navigate the development of a contract with TransUnion and also received help from Credit Builders Alliance (CBA).3 After the first contract fell through, CAMEO had to negoti“The biggest challenge is that
ate a second contract that would designate it as a third-party vendor—this set
we’re not lenders and we don’t
the project back by at least six months. CAMEO’s lender members can agree to
have a deep understanding
share credit reports with a third party (CAMEO), but the members must bear
the full liability for making sure the data is secure and confidential. Accordaround lending law as it’s
ing to CAMEO, the TransUnion contract language was based on consumer
applied in California. We’re also
lending, but California regulation for consumer lending is very different from
not programmers so we don’t
business lending and it was difficult to find an expert who could navigate both
understand what’s required on
systems.
the MMS side to make it work
better.”
• Barrier 3: MMS was not initially designed for use in this type of statewide aggregation
model, so it was challenging to modify the software to serve the needs of all the users
Shufina English, Director of
involved. Resolving that design issue, however, positions this approach for the reach
Programs & Operations at
it originally sought. The MMS platform was initially set up to allow a single
CAMEO
subscribing lender to view a borrower’s credit report and use the automated
underwriting software. Many changes to MMS, some of them quite difficult to
achieve, were required before multiple lenders could share a license. Accion
staff had to reconfigure the software to enable multiple lenders to pull credit reports while maintaining the confidentiality standards required by law. The solution that CAMEO and Accion developed allows CAMEO to operate as a
group clearinghouse, directing applications to the correct lender and providing technical assistance as necessary.
• Barrier 4: Initial startup costs for this approach are significant, but it may take years to generate outcomes funders expect like
increased lending volume. CAMEO needed funding to purchase the MMS license, recruit participants, train them on
MMS, and, at least initially, to staff the application process. “Anyone who does this model needs special ‘research and
development-type’ funding because banks aren’t going to get CRA credit for this since it will be 24-36 months before
you’ll achieve an increase in lending volume,” said Claudia Viek, CAMEO’s CEO.4
3
Credit Builders Alliance (CBA) is a nonprofit intermediary dedicated to helping low- and moderate-income individuals build their credit and access affordable financing.
Visit CBA online at http://creditbuildersalliance.org/.
4
CAMEO estimates that the pilot will require about $500,000 over the next 2-3 years, which would subsidize MMS use for CAMEO members, as well as pay for staff to
help build members’ organizational capacity.
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As with any new idea, many of the kinks associated with getting this
program off the ground are still being worked out. Still, given the focus
of the initiative and the feasibility of working through many of the
aforementioned barriers to achieve a sustainable model for increasing
lenders’ volume, there are several opportunities worth leveraging.
• Opportunity 1: The demand driving this innovative approach is real. Small
businesses want more affordable capital than microlenders can provide.
In addition to improving efficiency and potential loan volume at existing lenders, community organizations that do not currently lend could
potentially leverage CAMEO’s expertise and use of MMS to begin lending,
especially in markets not yet served by existing microlenders. CAMEO has
already lined up a second group for the MMS pilot of business assistance
providers in rural areas that do not currently have any loan capital available to help small businesses. The WSMA model (see box at right) shows
that loan capital is flowing to cities and community organizations that have
no prior experience establishing or running a microloan fund. Rather than
reinventing the wheel each time a microlender receives funding, they can
focus on finding clients, while statewide microenterprise associations using
MMS take care of the rest.
• Opportunity 2: This model could eventually become financially selfsustaining. Both CAMEO and WSMA are looking for a sustainable model
of providing services across their states without ongoing funding support.
They could generate income by charging a fee-for-service to member lenders. Under this model, services could include policies and procedures to set
up a loan fund, technical assistance on industry best practices, training on
use of MMS, loan origination through MMS and loan servicing. New loan
programs can be launched faster with this model and have a higher likelihood of making successful loans, given MMS’s track record.
CAMEO took the innovative idea to aggregate microlenders’
demand for automated underwriting and launched one of the very
first programs of this kind; this required more creativity, flexibility,
patience, time, involvement of leadership and money than they initially
thought. Their work and WSMA’s have established two models that
others could adopt. Organizations seeking to do so, however, will still
need to work out legal issues specific to their state and will continue to
face limited funding, evolving technologies and financial systems that
are not designed to facilitate this type of aggregation or automation.
Federal agencies that make loan capital available for microlending,
including SBA, Treasury and USDA, can support these efforts by
incorporating funding opportunities into their programs for small
lenders to participate in aggregated systems like this one.
The authors of this brief are Catherine Meyrat ([email protected]),
Principal at InnoStratX, and Lauren Williams ([email protected]), Program
Manager for Entrepreneurship at CFED. Special thanks to Shufina English,
Director of Programs and Operations, and Claudia Viek, CEO of CAMEO,
who shared their expertise in several interviews.
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SEEKING SUSTAINABILITY: THE
WASHINGTON APPROACH TO
LOAN AGGREGATION
Washington State Microenterprise Association
(WSMA) is also leveraging MMS as a platform to
scale lending in Washington State.
“For years our small lender members had been
asking for administrative backend support,”
said Teresa Lemmons, Executive Director of
WSMA. The lenders wanted help setting up loan
programs, underwriting, loan servicing, collections
and accounting. WSMA identified use of MMS
as a key component in providing that back office
assistance to its members and spent several years
securing funding and installing MMS.
Since launching MMS in the summer of 2012,
WSMA has been waiting for lenders to start
making loans via MMS. Two organizations new
to lending have signed up: a municipality that
received loan capital and is contracting with
WSMA to set up its lending program, and a
nonprofit focused on asset building that just
received Community Development Block
Grant (CDBG) loan capital to start a microloan
program. WSMA received its first loan to process
in May 2013, a year after it acquired use of MMS.
The focus of the WSMA model is on sustainability.
They will contract with lenders for a fee to help
with lending protocols, loan policies, designing a
loan program, loan underwriting via MMS and
also loan servicing. Initial funding to purchase
MMS was provided by an SBA PRIME grant, but
the mission is to build a model that ultimately
pays for itself.
“We’re helping the organizations build their
own capacity to do more lending and be more
sustainable. And it’s helping us build capacity
and hopefully adding capacity to the State of
Washington,” said Teresa. Long-term, WSMA
would like its own loan capital in order to lend in
areas of the state with lending gaps.
4