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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.
  • 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
  • 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 o o o o o program and portfolio assessment; product development and staff training in microfinance and business development services; developing systems for client tracking and program performance; strategic planning; board development and fund development strategies
  • Our Agenda for Today Setting the Context Who is in the room? Lets 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 3
  • 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. 4
  • 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.
  • 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
  • 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.
  • 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.
  • #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.
  • 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 womenowned businesses? What are the trends for the amount of lending to small businesses from commercial banking institutions?
  • #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.
  • 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.
  • 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?
  • 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
  • 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
  • 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.
  • Are You Ready to Ramp Up Your Microloan Program? Amelia Lobo, Associate Friedman Associates
  • 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?
  • 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?
  • 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?
  • Loan Guidelines Loan product guidelines must be prescriptive, not descriptive. Staff - loan analyst, loan committee member, marketing specialist - must define and understand the organizations 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
  • 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
  • Lending Procedures How does an applicant make it from application to disbursementand 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?
  • Do you have analytical tools to guide your decision-making? The central repository of all of the applicants information: borrower and business description, financials, debt schedule, collateral, etc. Force analy
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