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MMS and Increased Businesses Creditworthiness

Thanks to Andrew Cole for this article.

Many of the borrowers that CAMEO microlenders serve aren’t able to access traditional capital for a variety of reasons – their credit is below bank standards, their business is too new, their cash flow is too tight. What happens to those borrowers, when they don’t quite qualify for the credit they want with a microlender? MMS users have adopted a variety of strategies to help those applicants become borrowers.

A large percentage of the Sacramento borrowers that Opening Doors works with are recent refugees and immigrants with thin or no credit history; many of whom are launching their businesses. Faced with no payment or business history upon which to base their underwriting decision, Opening Doors makes very small starter loans between $5,000 and $10,000. Because the loans are small, the borrower can often pay them back within one or two years to grow their credit and develop a relationship with Opening Doors. Once they have paid off their first loan, they are eligible for a larger loan – larger than the underwriting criteria may dictate, since the borrower and lender have a personal connection.

Mojtaba Zafari, of Zafari Electronics, came to the U.S. as a refugee with no credit history. He started his own business that sells speaker and phone accessories at a Sacramento flea market and rents karaoke equipment for parties. He went from $10,000 in net profit his first year to 30,000 his third after receiving a small starter loan from Opening Doors. Because he paid his loan consistently and early, the lender recently made a second loan to help Mojtaba expand his inventory and product line.

Women’s Economic Ventures (WEV) doesn’t make starter loans, but they will refinance an existing loan as the business evolves. Amara Bessa of Kariella first applied for a $10,000 loan in 2015, but WEV’s loan committee thought her books were not in good enough shape to make the full loan. They approved her for a $5,000 loan, with the understanding that she would continue to work with WEV trainers to get her documentation in good order. Eight months later, she was approved for a $15,000 loan to add additional swimwear lines to her business, and is currently making her scheduled payments. Trystology, an adult toy store in downtown Santa Barbara, was making their payments comfortably when an economic slowdown cut into her profits. WEV made a second loan to the business to help cover payroll while she got her business back on track, and is working with the store to address location problems.

Other MMS users are less comfortable making repeat loans to the same business: CDC Small Business Finance will consider the matter, but only if the applicant has the cash flow necessary to cover the loan, regardless of past borrowing history. The Mission Economic Development Agency has received applications from their current borrowers, but requires six months to a year of payment history before considering a second application; none of their loans are that old.

Repeat loans are one tool that cultivates long-term relationships with borrowers, and enables lenders to work with borrowers to ensure that the business has access to credit without sacrificing their profits.