We recently posted a Challenge with ACCION of Texas (ATI), seeking a way to more accurately evaluate micro-loan applicants who may lack traditional credit history. We asked Veronica Flores-Paniagua, VP of Communications for ACCION, to talk to us a bit about their Challenge and some of the people who will be helped by the solution.
Hi Veronica, thanks for being with us today and talking to our Solvers about your Challenge. Microlending is a topic that may be new to some of our Solvers - can you tell us a bit about microlending in general, and the people or businesses that typically receive funding in this way?
Sure. Most people may be familiar with microlending in the Third World, where business loans even as small as $100 can make an enormous difference in a family’s life. The philosophy driving microfinance in the U.S. is similar – lift individuals and, thereby, lift communities. But, out of necessity, domestic microfinance is done on a larger scale. By the definition of the U.S. Small Business Administration, a microloan is any business loan smaller than $50,000.
Why microlenders and not banks? Two reasons. One: The average loan to ATI customers is about $16,000. Traditional lending institutions typically won’t touch such a “small” commercial loan because the administration of it is not a good value proposition. Two: Banks are regulated and must be more rigid in their standards to protect their assets. As a nonprofit, ACCION can be flexible. We still rely on collateral and character, as banks do. But we look at it differently. Where a bank looks at a minimum FICO score of 680 for a commercial loan, our average customer has a FICO score of 575.
A microloan customer is typically a business owner who’s just starting out. ACCION Texas clients include underemployed and recently laid-off workers who are willing to work but cannot find employment. These potential clients often have the desire, ability, and vision to operate their own businesses, but cannot access capital through a conventional bank loan. ACCION’s borrowers are 85% minority and more than 40% women, two groups that have been historically underserved by commercial lenders.
Can you give us some examples of people who have achieved success as a result of receiving a micro-loan?
Absolutely. One success story we like to tell is about Jerry Parker from New Orleans. As owner of Greater Opportunity Developments, Jerry received an ACCION Texas Inc. loan to buy run-down properties, renovate them back to health and then rent or sell them – leaving neighborhoods in better shape than he found them. So far, he’s renovated eight properties around the city, replacing blight with hope. He expects to create at least one part-time job, resulting in another small, yet positive change for New Orleans.
Another great story is about Lisa McGrath, who owns Tails Natural Pet Market in San Antonio, Texas. Lisa's pet store sells unique products that are environmentally friendly, all-natural or made from recycled materials such as men’s vintage neckties that now serve as doggie collars. Her business helps San Antonio pet owners make more eco-friendly decisions when it comes to pampering their pets.
McGrath received a loan from ACCION Texas Inc.’s green loan fund to start her business. Tails Natural Pet Market also works with other socially- and environmentally-responsible companies such as its Web-hosting service, Sustainable Hosting, and Dharma Merchant Services, a certified green business that donates a percentage of credit card fees to McGrath’s preferred charity – Alamo Area Partners for Animal Welfare (AAPAW.) Even McGrath’s business cards are made from recycled product packaging.
You can read about some of our other borrowers here.
In addition to providing seed money, you provide training and support to small businesses – can you tell us a bit about that?
The ACCION Business Center was founded in 2010 when ACCION Texas Inc. merged with a local nonprofit lender in San Antonio, Texas and inherited the Women's Business Center. The Business Center formalizes what ACCION Texas has been doing for over 18 years, helping entrepreneurs understand if they’re ready for a business loan, but also providing the financial education necessary to stabilize and grow their business.
What larger economic benefits have you seen to microlending?
Our progress toward community economic development objectives is periodically measured and documented by third-party studies. A 2006 study (updated in 2009) by economist Dr. Jon Hockenyos of Texas Perspectives Inc. found that the cumulative economic effect of ACCION Texas’ lending is substantial. Using input-output analysis of new economic activity, he found that the ACCION Texas’ commitment of $42 million in lending capital (from 1994 to 2005) translated into $77.8 million in total economic activity, including $24.8 million in increased wages. This study confirmed that for every dollar lent by ACCION Texas, an additional 60 cents in new economic activity is created. Our loans sustain and create jobs. We have found that for each business that receives a loan from ACCION, 1.6 jobs are created or sustained. Since inception, ACCION loans have created or sustained over 17,000 jobs.
How might other non-profit organizations benefit from this solution?
We provide underwriting services and software for microfinance organizations nationally and help other microlenders reach scale through our Microloan Management Services ™ (MMS). This proprietary underwriting system combines speed, capacity, and consistency and is a major reason we’re the largest microlender in the country with faster loan processing and better risk assessment. The solution would similarly help us lead the microlending industry in serving even the most marginalized individuals.
This is a very cool Challenge and we're excited that you chose InnoCentive's Solver network to find a solution. Good luck and we look forward to hearing about its success!