The Promise of Microfinance: Strategies to Build Volume

and Performance

Presented by Amelia Lobo, Friedman Associates

Hosted by Little Dixie Community Action Agency under a grant from the U.S. Small Business Administration Program in Investments in Microentrepreneurs Program (PRIME).

Introductions & Webinar Instructions

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Presenter: Amelia Lobo

• One of the nation's premier microfinance specialists

• Former Senior Underwriter for ACCION NY (now ACCION USA). Underwrote over 2,000 microloans

• Experience in complex professional liability coverage for large financial institutions

• Obtained a BA in Economics from Grinnell College and an MBA with concentration in Economics of the Firm from INCAE, Latin America's leading business school  

• Currently conducting portfolio reviews of microlenders and CDFIs; revising policies and procedures; developing new products; conducting staff training

Introduction to Friedman Associates & Webinar Instructions

• As a community-based organization that helps low-wealth individuals and communities build wealth, create jobs and small businesses, your work is essential to the nation’s economic recovery.

• The mission of Friedman Associates is help you achieve your vision for a sustainable and economically vibrant community – and demonstrate the results that lead to increased funding and long-term success.

• Areas of specialization include product development and staff training in microfinance and small business lending; business development services; systems for client tracking and program performance; strategic planning, board development and fund development strategies.

The Funding Environment

• New Sources (SBA, RMAP, CDFI)

• Highly competitive

• Funders are looking for organizations that: Demonstrate effective use of funds

• Strong historic performance

• Compare favorably to the industry at large

Are preparing for growth

• Improving results

• Using capital more effectively

Performance

• Performance is more than increasing disbursements.

• It’s important to be good stewards of the funds Improving management of delinquent loans

Improving underwriting quality

Task 1: Address issues in the current portfolio

• Manage delinquent accounts Aggressive follow-up of delinquent accounts

• Co-signers

• Skip-tracing

Pursue collateral

Identify loans for restructuring

• Not all loans can be restructured

Write off loans

Analyze what went wrong

Task 2: Prepare for growth

• Growth strategy

Increase applicant volume

• Offering new products

• Increasing penetration of current market

• Expanding geographic reach

Increase volume of disbursed loans

• Improve decision making process

• Do more with less

Efficient use of operating expenses and human resource

Lesson 1: Develop a strategy for the use of data/information

• Transactional information Repayment; late fees; balances; terms

• Demographic information Analysis of impact on household income & employment

• Risk and trend information

Use trend information

• Identify and address portfolio strengths and weaknesses Concentration of the portfolio

Percentage of loans with easily perfected collateral/cosigners

Repayment trends

Characteristics of the delinquent loans

• Reason for loss

• Cosigner/collateral response

Portfolio concentration analysis

• Percent of dollars and loans Start-up vs. established business

Poor/good/excellent credit

Cosigner

Car/property as collateral

Major industries

Loan purpose

• Compare to industry when possible

Lesson 2: Rethink guidelines

• Effective lending guidelines Inform the lending process from beginning to end

Explain the organization’s ideal borrower profile so that all stakeholders understand it

• Reinforce internal controls Aid in loan recovery in case of default

• Ensure consistent decisions

• Link current decisions to past performance

When reviewing loans- what are your decision making factors?

• Match between business operations and organization’s mission

• Character

• Necessary level of financing

• Probability of success

• Borrower experience

• Business plan and market analysis

• Collateral or other outside security

Loan product guidelines

• Tie loan amount to risk

Credit quality

Length of operations

• Use quality of financial documentation to inform perception of risk

Are financial projections in line with taxes, financial statements, ledgers, bank statements?

• Uncertainty = risk

• Risk must be controlled either by decreasing amount or increasing outside security

• Require that lending decisions be based on analyst’s perception of the business’ probability of success

Analyst must create projections based on borrower information NOT rely on borrower’s business plan

• List due diligence items

• List collateral requirements and how the collateral must be perfected

Loan product guidelines

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The Best Product Guidelines….

• Distinguish between start-up and existing businesses

• Are very specific as to:

Minimum credit quality

Maximum debt

Minimum cash flow

Required outside security

Required documentation

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• Require stronger credit/financials/security for larger or riskier loans

• Avoid putting up unnecessary barriers

Requiring too much documentation

Example: Requiring a formal business plan from a very informal borrower or a business long in operations

• Example

The Best Product Guidelines….

Our recommendations require

• Increasing the time invested in

Financial analysis

Due diligence review

Filing liens

Document management and quality control

• How can you make those investments given already limited resources?

Simplify

• Standardize language

• Review product mix to standardize terms as often as possible

Focus on borrowers with high probability of success

• Screen borrowers more effectively

• Communicate potential loan amounts, timeframes, terms and conditions as early as possible.

Changes require significant investment in human resources

Lesson 3: Rethink the lending process

• Decrease the amount of time and qualified human resources spent on less promising applicants

More effective screening

Openness with applicant about loan possibilities

• This approach can decrease frustration

For applicants

For employees

Loan Process- Functions

• Outreach• Intake• Documentation Gathering and Interpretation• Analysis• Decision Making• Documentation and Quality Control• Loan Disbursement

Step 1: Outreach

• Develop a growth strategy

Who will be targeted? Where?

• Develop outreach message and method

• Track effectiveness

Of message

Of partnerships

• Prepare for success: identify the operational areas that will be impacted and ensure that the resources are in place to avoid impacting risk management or service

Decision Maker: Upper Management

Step 2: Intake

• Does applicant match organization’s mission profile?

Demographics

Size & nature of business

• Is the borrower far enough along in business plan?

• Can your loan fully fund the business’s capital needs?

• What can the borrower expect? (Loan terms/Turnaround time)

This should be communicated to the borrower

Decision Maker: Intake Specialist

Step 3:Information Gathering

• Credit Bureau Report

• Detailed and proven capital needs

Compared to credit-worthiness (Credit Bureau Report/Debt level)

• Required financial documents

Proof of investment, savings, income, business ownership

Business Plan consistent with the business needs

Decision Maker: Loan Officer

Step 4:Analysis

• FIRST- Due diligence on outside income, debt, and collateral

• SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats)

• Analysis and (re)creation of financial statements

• Site Visit

• THROUGHOUT- Comparison to product guidelines

• LAST- Completion of Loan Review Package

Decision Maker: Loan Officer and/or Underwriter

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What Is An Analytical Tool?

• A spreadsheet that is used to enter the business’s and borrower’s information, focusing on the decision making factors of the loan

• Must be completed for every loan; larger or more complex loans require more information entered

• The spreadsheet should be used by the loan officer during the entire application process- the end result should be used to present the loan proposal to the loan decision committee

• The spreadsheet contains the loan officer’s understanding of the business, its strengths and weaknesses as well as her/his impression of the borrower’s skills

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Tool Format

• Excel is best• Contains all the important information

Borrower and cosigner name & address

Business name

Business story

Borrower credit

Debt story

Financials (Income and Expense Statement, Cash Flow, Bank Statement Info.)

Strengths, Weaknesses

Loan Terms

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A Good Tool…

• Encourages the loan officer to determine the loan’s strengths and weaknesses

By calculating cash flow, ratios, etc.

By guiding the financial review

• Relates the information and analytical review to the guidelines and flags missing or disqualifying information

• Records due diligence information to be used for promissory note and lien filings

• Records the terms of the loan

• Records the names of approving officers

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On An Organization-wide Scale, A Good Loan Analysis Spreadsheet….

• Ensures that ALL decisions are based on the same factors

• Speeds adoption of guideline changes

• Speeds loan committee review by

Providing information in a standard format

Stressing deviations from the guidelines

• Acts as the collecting officer’s primary resource

Step 5:Decision-Making

• Review of the analyst’s work (Loan Review Package)

• Review of primary financial data (if applicable)

• Final decision based on organization’s appetite for risk- in other words, how closely the recommendation hews to the guidelines

• Approval or declination

• Final terms set

• Avoid going back and forth or allowing appeals

Decision Maker: Loan Officer or Underwriter and Loan Decision Committee

Step 6:Documentation and quality control

• If organization’s structure permits, this should be someone other than the loan officer/underwriter

• Uses a standard checklist for all loans

• Compares the information on the approval sheet to the primary source documentation

• Checks off that all due-diligence items have been covered

Auto titles, property deeds, etc.

• Creates the promissory note and other documents from boiler-plate language

• Hands off to another party for quality control review

Decision Maker: Administrative Associate

Step 7:Loan disbursement

• May be either a purely clerical function or the loan officer

• Uses a standard checklist for all loans

• Reviews the promissory note with borrower and ensures that borrower’s ID matches the information

• Collects final documents

• Obtains borrower signature

• Stores the original legal documents and completes the loan file

Decision Maker: Disbursing officer

Step 8: Revisiting Post-Loan Technical Assistance

• Investment in staff training customer service.

• Implementing structured performance-based consulting with a clear value proposition to the customer.

• Stronger focus on financial education and credit building.

• Increased use of volunteer mentors – Micrometer (www.micromentor.org)

Mountain BizWorks Growth through Objectives (GO) Program

• Business owners who seek to move beyond the business planning stage enroll in the GO program.

• Initial assessment and a structured coaching program of up to 10 hours of one-on-one consultation over a three-month period.

• Coaching increases your ability to expand your business and to succeed in competitive environments.

• Business Developer helps to identify the most important issues related to business’s success.

Growth through Objectives (GO) Program

• Cultivated a group of 13-14 contractors – “cream of the crop” - $28/$40 hr.

• Assessment – financials, marketing and operations, etc.

• Fee: $250 for start-ups/$350 for advanced businesses

• Client action plan

Community Capital of Vermonthttp://communitycapitalvt.org/images/Forms/map%20application.pdf

• Post-Loan Technical Assistance (PLTA) & Management Assistance Program (MAP)

• Borrower eligible to receive "post-loan" support during the term of the loan: at least 13 hours of consulting time worth no more than

$1,000 with a private consultant not to exceed $75;

a $500 grant to pay for the cost of attending an eligible business education workshop, trade show, or conference.  This grant can also be used to purchase membership in a trade association or chamber.

New: grants for up to $2,500 for a business; and $5,00 for informal or formal groups or networks of businesses.

Outcome

• Organizational: Decreased number of human resource hours spent on

applicants that will not qualify or will be withdrawn

Decreased employee frustration/burn-out

Improved internal control

Improved asset recovery by ensuring that all collateral is perfected and all pertinent information is readily accessible

Decision making that is more consistent and reflective of

risk appetite and experience

Outcome

• Client:

Decreased anxiety/frustration

• Applicant is told early about chances for loan/terms

• Applicant receives a quick answer

• Applicant understands strengths and weaknesses of business model/application

Development of a more open relationship

Self-Assessment: Ask Yourself

Addressing current issues in the portfolio

• How does our performance and portfolio structure compare to that of our peers?

• Have we fully explored ways to obtain repayment such as obtaining repayment from the cosigner and collateral?

• Do we have loans that appear to be in good standing simply because they’ve been restructured or are on a $0 payment extension? Are we doing a good enough job of monitoring those loans?

• If borrowers are unable to repay their loans, what is the reason? In which cases did we (or should we have) foreseen these issues?

• Do our borrowers consider our debt to be “less important”? Why?

• What lessons can we draw from our delinquent and written-off accounts, especially with regards to our financial analysis and outside security requirements?

Moving Forward

• How can we incorporate portfolio and repayment data into our underwriting guidelines and everyday decisions?

• What elements of loan underwriting have we omitted?

• How can we decrease the amount of time spent reviewing applications for businesses whose loan requests are withdrawn or declined?

• Do we have a well-developed policy regarding loan term modification?

• How can we better use pre-loan technical assistance to help borrowers make decisions regarding capital needs?

• How can we better use post-loan technical assistance to aid in repayment?

Questions?

Contact

• Amelia Lobo, AssociateFriedman AssociatesOne Knollwood LaneIowa City, IA 52245Office:(319)248-3576Cell: (646) 334-6706amelia@friedmanassociates.netwww.friedmanassociates.net

• Jason Friedman, PrincipalFriedman AssociatesOne Knollwood LaneIowa City, IA 52245319-341-3556jasonj@friedmanassociates.netwww.friedmanassociates.net