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Estimating Supply and Demand for Microcredit

Date post: 06-Sep-2014
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Learn about how to do a qualitative and quantitative analysis to determine the gap in your market for micro and small business financing. Friedman Associates has developed a unique methodology in this area.
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Estimating Supply and Demand for Microcredit in Your Community Facilitated by: Jason Friedman, Principal, Friedman Associates Blaise Rastello, Urban Oasis Development, LLC Amelia Lobo, Associate, Friedman Associates
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Page 1: Estimating Supply and Demand for Microcredit

Estimating Supply and Demand for Microcredit in

Your Community

Facilitated by:

Jason Friedman, Principal, Friedman AssociatesBlaise Rastello, Urban Oasis Development, LLCAmelia Lobo, Associate, Friedman Associates

Page 2: Estimating Supply and Demand for Microcredit

Friedman Associates

• Our mission is to help MDOs and CDFIs to 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: o program and portfolio assessment; o product development and staff training in microfinance

and business development services;o developing systems for client tracking and program

performance; o strategic planning; o board development and o fund development strategies

Page 3: Estimating Supply and Demand for Microcredit

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Our Agenda for Today

• Setting the Context

• Who is in the room? Let’s take a poll!

• Estimating Supply and Demand: Crunching the numbers

• Estimating Supply and Demand: Key informant interviews

• How to use the data to make key decisions

• Getting your house in order to prepare for new opportunities

Page 4: Estimating Supply and Demand for Microcredit

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Setting the Context

• Awareness and support for microcredit in the U.S. is at an all-time high – both in the private and public sectors.

• Increased attention on volume, performance, and impact.

• Bottom line: where are you going with your microloan program? What is your vision? Have you fully investigated the market opportunities?

• An opportunity to exit the room now.

Page 5: Estimating Supply and Demand for Microcredit

Supply and Demand Analysis

1. Why? To determine the extent of the demand for microcredit to aspiring entrepreneurs and existing very small businesses in a defined area.

2. Quantitative: Includes analysis of secondary data sets and proprietary data.

a. Analysis of trends in firm characteristics, industry sectors, lending patterns across your footprint

b. Estimate of Demand/Supply mismatch by zip code

3. Qualitative: Includes confidential key informant interviews and online surveys.

Page 6: Estimating Supply and Demand for Microcredit

Quantitative Analysis

Drills down to the zip code level in your footprint to identify those areas that are most in need of capital.

We use 5 main data sets

Page 7: Estimating Supply and Demand for Microcredit

The role of D&B Data

• All of the datasets are in the public domain except for Dun & Bradstreet data.

• We recommend that you purchase data from D&B because: it includes non-employer or sole proprietors;

you will own the data and can download it into Excel or ACCESS and build lists of business leads for email, direct mail and telemarketing campaigns; and

you can identify qualified prospects and warm leads by geography, SIC, revenue, and much more.

Page 8: Estimating Supply and Demand for Microcredit

Cost of D&B Data

• The cost of the data will depend upon the number of zip codes in your footprint, the employment levels and revenue.

• For example, one option is to pull D&B records for firms with 4 or fewer employees and $250,000 or less in sales.

• However, if you are a microlender that is considering offering larger loans, you may want to look at firms with 9 or fewer employees and with sales of $1 million or less.

Page 9: Estimating Supply and Demand for Microcredit

#1: Analysis of trends in firm characteristics, industry sectors, and lending patterns across your footprint

• Identify patterns in employment size, industry, and sector growth.

• Analyze the commercial lending within each zip code by mapping the CRA loans by loan size, loan volume, dollar volume, loans per 100 businesses, and percent change in loan and dollar volume from 2007 to 2009.

Page 10: Estimating Supply and Demand for Microcredit

What will you learn?

• What are the trends in the number of micro and very small businesses?

• What zip codes or neighborhoods experienced growth or decline?

• What sectors experienced growth or decline?

• What are the trends for minority and women-owned businesses?

• What are the trends for the amount of lending to small businesses from commercial banking institutions?

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#2: Estimate of supply and demand mismatch by zip code.

• We estimate current capital demand using data from the 2007 Survey of Small Business Owners which provides the distribution of the dollar amounts that firms need.

• We compare these demand estimates to the dollar amounts lent for loan sizes under $100k and loans to SB with less than $1M in revenue we are able to identify the gaps in the market and where capital is needed.

Page 16: Estimating Supply and Demand for Microcredit

Identify High Priority Zip Codes

• After compiling all this data, we look at each zip code across several dimensions including: estimated lending gaps, firm density, change in lending 2007-2009, lending rates for 2009, and areas where there are high concentration of small firms and minority and women-owned firms.

• In comparing this data by zip code we can identify zip codes as high priority target areas for micro-loan funds to focus on.

Page 17: Estimating Supply and Demand for Microcredit

What do we learn?

• Size of the gap? In one major urban city we found the gap to be $33 million.

• Where is demand concentrated?

• Which zip codes have less than average lending rates?

Page 18: Estimating Supply and Demand for Microcredit
Page 19: Estimating Supply and Demand for Microcredit

How do you use the data?

• Input for strategic planning

• Targeted outreach

• Sector initiatives

• Decision point: do we move up market?

• Use as for your case statement for funding

Page 20: Estimating Supply and Demand for Microcredit

Part II: Key Informant Interviews

• Confidential interviews with individuals and organizations to offer keen insights into the issue of access to capital in your community:

Financial Institutions Public and private economic developers Small business development providers Government officials Other

• Obtain candid observations on their assessment of the effectiveness of your current program.

• Supplement with anonymous survey

Page 21: Estimating Supply and Demand for Microcredit

Cost for Supply and Demand Analysis

• Depends on your footprint/zip codes and whether you want a sense of demand outside your footprint.

• Then we get a quote from D&B and our cost for the analysis.

• The Key Informant interview process depends on the number of individuals interviewed/surveyed.

Page 22: Estimating Supply and Demand for Microcredit

Are You Ready to Ramp Up Your Microloan Program?

Amelia Lobo, Associate Friedman Associates

Page 23: Estimating Supply and Demand for Microcredit

Step Back, Reflect, Re-Assess

• Does our mission accurately reflect the reality of our market and economy?

• Do we seek to better penetrate our existing markets or do we go up market?

• What changes can we make in the program to better fulfill our mission and achieve greater volume and impact?

Page 24: Estimating Supply and Demand for Microcredit

What do we want to achieve?

• Is our microloan program helping our target clients… Learn to build and use credit?

Increase household income?

Make modest investments in capital improvements, equipment, products, and training?

Diversify or expand into new markets?

Continue operating their businesses after minor emergencies?

How do you measure success?

Page 25: Estimating Supply and Demand for Microcredit

Do we have the tools to work effectively?

• Do our guidelines provide real guidance?

• Are we creating institutional “memory” rather than relying on a few key employees?

• Do we approach loans in a consistent way?• Regardless of who the loan officer is?

• Do we know what has gone wrong when we lose an applicant? A loan?

• How do we analyze our performance?

• How can we prompt staff to continuously improve decisions?

Page 26: Estimating Supply and Demand for Microcredit

Loan Guidelines

• Loan product guidelines must be prescriptive, not descriptive. Staff - loan analyst, loan committee member,

marketing specialist - must define and understand the organization’s ideal borrower profile.

Applicants must be compared to that profile

This helps ensure consistency among analysts

• Guidelines and lending process must “fit” together Every step in the lending process must call for a

“Stop/Continue” decision based on comparing the information gathered so far to the guidelines

Page 27: Estimating Supply and Demand for Microcredit

The Best Loan 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

• 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

Page 28: Estimating Supply and Demand for Microcredit

Lending Procedures

• How does an applicant make it from application to disbursement…and beyond?

• How do we allocate human resources? Who does what, when? Is this the most efficient

approach?

• How do we minimize the opportunity for mistakes? Fraud?

• How do we deal with losses? Collections, Write-offs, Provision

• How do we analyze performance and use data?

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Do you have analytical tools to guide your decision-making?

• The central repository of all of the applicant’s information: borrower and business description, financials, debt schedule, collateral, etc.

• Force analysts and the Loan Committee to focus on the decision making factors of the loan

• Cash Flow; Credit

• Encourages the comparison of the proposed loan to the Loan Guidelines

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

Page 30: Estimating Supply and Demand for Microcredit

Your Loan Analysis Tool

• Contains the organization’s understanding of the business, not the borrower’s.

• Can be used as the basis of Loan Review and Disbursement.

• Document who reviewed, approved, and disbursed a loan.

• Can be used later on to: refinance a loan, determine whether loan terms should be altered, help collect on a bad loan, or audit the portfolio and improve performance.

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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

Page 32: Estimating Supply and Demand for Microcredit

Using Portfolio Data

• Basic: Account & demographic data

• Expanded: Over-all performance & write-off

• Power-user: Using data to drive loan decisions Industry vs. Repayment

Credit Score vs. Repayment

Outside Security vs. Repayment

Start-up vs. Repayment

• How do we incorporate our findings into future decisions?

Page 33: Estimating Supply and Demand for Microcredit

Information is produced at every stage

Page 34: Estimating Supply and Demand for Microcredit

How do we invest our human resources for maximum impact?

• Generating leads

• Relationships Training Programs Mentoring and follow-up Collections

• Analysis Do we create value in this stage? If so, how do we pass that value on to our clients?

Page 35: Estimating Supply and Demand for Microcredit

Let’s Take Your Questions


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