By SBAM Member Andrea Mosher, SVP of Lending at Lake Trust Credit Union
In recent years, growing numbers of forward-thinking financial institutions have begun to embrace micro-lending, the practice of providing smaller, short-term loans that small businesses and individuals can use to unlock access to capital that might otherwise be inaccessible to them through traditional lending products.
Micro-loans are typically much easier to qualify for than other types of business loans at higher borrowing amounts. For small businesses and aspiring entrepreneurs that have found mainstream business loan products either unavailable or too expensive, a micro-loan can be a difference-maker. Micro-lending can help purchase or upgrade critical tools or infrastructure like a tractor for a landscaping business, a photo booth for a photographer, or a piece of equipment for an HVAC company. It can help improve or expand facilities, and give a small enterprise the boost it needs to take the business to the next level.
While more research is needed, and firm conclusions about the long-term structural impact of micro-lending remain elusive, a number of studies around the world have found that micro-loans can expand business activity and increase small business ownership and investment.
Our own experiences here at Lake Trust Credit Union support both the popularity and potential positive impact of micro-loan programs. Recognizing a need for additional micro-lending opportunities in the communities we serve, we applied for and secured a Community Development Financial Institutions (CDFI) grant and subsequently rolled out a 60-day pilot program in three Michigan markets (Mt. Pleasant, Brighton, and Ann Arbor) in February 2019. The response was overwhelming. The program officially went live in April, and Lake Trust had already disbursed $2 million in small business loans by the end of November.
The size of any one loan may be relatively small (our average loan size is about $22K), but the potential benefits are significant—and the impact is potentially transformative. Micro-lending helps small business owners stay out of the costly and potentially damaging personal debt so many incur when they feel forced to fund startups and improvements through personal credit cards. And on a broader scale, micro-loans can be an effective way to help small businesses stay open and economically viable, contributing to economic stability and vitality in neighborhoods and communities. Thriving businesses that are able to invest in themselves using micro-loan financing often create jobs, and help enhance not just the economic prospects of a community, but the civic and social fabric, as well.
Financial institutions considering micro-lending would be wise to recognize the scale and scope of those benefits, to design a micro-loan program that is flexible enough to meet the diverse needs of potential small business borrowers, and to build the mutually beneficial long-term relationships that make communities and businesses stronger and more sustainable. In that way, they can be doing their part to provide all-important access to affordable financial products and services—a defining trait of economically vibrant communities across the state of Michigan and around the country.