As part of our CDFI Spotlight series, guest blogger Matina Granieri, AVP of Marketing, FINANTA, reports on their work to open up lending opportunities for small businesses in Philadelphia.
Around the world and throughout history lending circles (otherwise known as tandas, roscas, susus, and more) have been used as informal community financial institutions. They have enabled those excluded from mainstream banking to access capital and build personal and business capacity. In a traditional lending circle, community members come together to create pools of money, each contributing a small amount each month, and rotating who receives the pool as a loan. Recently, various CDFIs across the United States have recognized the potential of this time-tested model in creating inclusive economies and building trust in populations unfamiliar with mainstream banking. Five years ago, FINANTA implemented a group lending circle model now called ACT Clubs (“Access Capital Together” Clubs). The success and popularity of this model has grown beyond expectation.
The program was created in 2011 after identifying a population of micro-entrepreneurs in Philadelphia seeking access to capital, striving to borrow under conventional lending criteria, and needing to build capacity in order to accomplish it. These entrepreneurs were not ready for standard small business loans due to a variety reasons. They needed to establish consistent credit, demonstrate cash flow, capital, and collateral; submit accurate bookkeeping and tax returns; and create a plan for expansion.
We were challenged to create an approach to facilitate access to capital and financial training for such types of borrowers. That is why the lending circle came to mind. By adopting the practice of shared responsibility, we could mitigate loan risk by having a group of peers guarantee one another and have a broader impact by reaching more borrowers. Hence ACT Clubs’ key component, the “group”, is what enables these micro-entrepreneurs to access their first loan and increment it, as they demonstrate capacity to handle larger loans with each cycle. As in a lending circle, group members guaranty each other; however, we advance a FINANTA loan to each member of the club, just like preparing and borrowing from a bank, except they are preparing and borrowing from a nonprofit lender.
This addresses the problem of “access” but not “capacity”. To build capacity, FINANTA addresses the listed reasons for traditional loan rejection in the first place, e.g. insufficient credit, bookkeeping, and collateral. This is where the ACT Clubs truly go beyond the traditional lending circle and adds high-touch and hands-on group and individual business and credit training. This included credit building and counseling, entrepreneurial training, group support and networking, smart banking, accurate tax returns and how they affect financial capability, marketing, local regulations, and legal matters. It also prepares to access more capital in subsequent cycles. Per cycle, participants receive 22.5 hours of group education, and 21 hours of one-on-one consultation. Credit scores become an asset, as FINANTA reports loan repayment activity to credit bureaus, and participants diligently work to maintain credit once they establish or repair it.
ACT Clubs’ success is due to the group members’ affinity resulting in high loan performance, greater business and personal revenue, more assets and job creation, and higher and sustainable credit scores. Since 2011, we have served 49 groups borrowing in 114 cycles, facilitating access to $6.2 million in 979 loans. With this approach, we have been able to approve over 90% of all club applicants. Based on this growth, we added and staffed a credit training/building unit to complement the assistance provided, and as a result increased TA hours per dollar lent to 70%. This means, each client is receiving 70% more hands-on, on-on-one assistance per dollar borrowed. Additionally, we assisted more than 20 clients in receiving grants of up to $10,000 each from The Merchants Fund, for a total of over $200,000. We have also graduated more club borrowers to traditional loans. In FY 2016, 22 of such borrowers went on to borrow individual small business loans from FINANTA and other financial institutions, the largest loan being an impressive $704,410.
FINANTA is also expanding its services to 7 counties surrounding Philadelphia, and have trained other groups to start up their own ACT Clubs and become Small Business Administration microlenders. As we look into the future, we strive to expand our clubs and serve even more underserved entrepreneurs, consumers, and homebuyers.