Paul Quintero, the chief executive at one of the nation's largest microlenders, looks forward to the day when his nonprofit ceases to make loans.
Accion East, in New York, lends to mom-and-pop business owners who typically do not qualify for bank loans, but Quintero's hope is that banks will someday view microlending as a viable line of business. Accion's loan rates are manageable around 12% but depository institutions, with their built-in funding advantages, could offer even lower rates and Quintero would have no problem ceding business to them if it reduced customers' borrowing costs.
"I have three little kids and I always say that my personal dream is for them to grow up and not know what microlending is because everybody offers it," Quintero says.
Until that day comes, some banks are content to play an indirect role in serving credit-challenged mom-and-pops, says Todd Hollander, an executive vice president in the business banking group at Union Bank. The San Francisco bank is wholly owned by Japan's Bank of Tokyo-Mitsubishi UFJ Ltd.
The $102 billion-asset Union Bank receives requests every day for small working capital, equipment or real estate loans and denies a fair number of them because the applicants have spotty credit histories or haven't been in business long enough to show consistent profits, Hollander says.
But rather than send them away empty-handed, Union refers the applicants to nonprofits like Accion, whose mission is to take risks that regulated banks cannot. Union will often take over the clients' deposit business, and some of those businesses eventually become viable enough to qualify for bank loans, Hollander says.
"There are alternatives to traditional banking that can still be responsible, and we need to open ourselves up to new ways of saying yes," he says, noting that Union recently referred a small food vendor seeking a $12,000 loan to Accion of San Diego. "Just because we can't help them doesn't mean they can't be helped."
There are other banks that will refer their not-quite-bankable applicants to nonprofit lenders about one-third of Accion East's referrals come from banks but the concept still remains foreign to many banks, according to Hollander and Quintero. The pair will be discussing opportunities for banks in microlending at a panel discussion at American Banker's Small Business Banking Conference in New Orleans that starts Monday, and developing partnerships with nonbank lenders will be one of their key messages.
"Some people are just not ready for prime time, and if you work with [microlenders] we can help grow and groom your clients so that they will become bankable," Quintero says. "There's no cost."
The title of the panel is "Reaching Underserved Markets," and joining Hollander and Quintero will be Rohit Arora, the CEO of Biz2Credit, a New York firm that matches prospective small-business borrowers with lenders.
Arora says the topic is a timely one because many budding entrepreneurs are women and minorities who have poor credit or are just starting out and aren't yet making money.
The good news for upstart mom-and-pops looking for financing is that money is out there. Apart from microlenders like Accion, a number of online alternative lenders have surfaced in recent years offering faster approvals. According to Biz2Credit, alternative lenders approved 63.2% of loan applications, compared with an approval rate of 50.1% at banks with less than $10 billion of assets and just 17.5% at larger banks.
The catch is that interest rates on such loans can be well into the double digits, and repayment can be onerous for small firms operating on slim margins, Arora says.
Still, business owners who take on high-cost debt become more bankable every time they make a payment.
"Alternative lenders are doing banks a service by helping these borrowers establish a credit history," he says. Plus, he adds, "a decent number of small-business owners who are borrowing less than $50,000 will eventually need to borrow more money."
Technology can help banks strengthen ties with nonbank lenders.
Biz2Credit, for example, is developing a platform in which it could quickly help banks find lenders for applicants whose loans they denied. With the applicant's permission, Biz2Credit can instantly transmit the loan information to other lenders and have a response within an hour.
If the answer is "yes," then the customer is on the road to becoming bankable, Arora says. Also, if the lender is a community development organization, then the bank can receive Community Reinvestment Act credit for the referral, he adds.