OFN's Small Business Finance Forum kicks off in just a few weeks—June 26–27 at the JW Marriott Chicago. The Forum is the only event of its kind that digs deep into the challenges and opportunities unique to mission-driven small business lending. With sessions that focus on everything from wealth building to understanding the consumer challenges, the Forum agenda is packed with insights from industry experts.
One session that is sure to prove engaging is the conversation led by Joyce Klein, Director of FIELD at the Aspen Institute on the Role of Pricing in Driving Scale in Microbusiness Lending. CDFI Connect sat down with Joyce to learn more about what to expect from the session.
The session builds on findings from the report, The Price of Access: How Scale-Focused Microlenders are Pricing for Growth. Can you tell us more about why this report was developed?
The Microfinance Impact Collaborative, who helped inform this report, is made up of a group of microlenders focused on dramatically increasing their small-dollar microloan portfolio. There is tremendous demand for these loans, particularly among low-income entrepreneurs and entrepreneurs of color who have less collateral and often lower credit scores, so there is a real need to provide financing that is manageable for these entrepreneurs to scale. That said, the economics for this are incredibly challenging for the lender. You lose money on every transaction. For microlenders that want to grow and become more efficient and reach more borrowers, there is a real struggle with improving the business model.
One strategy they have all looked at is raising pricing to the extent they can, while keeping the products affordable to borrowers as a way to make that business model better.
Raising their interest rates on their smallest loans allows them to reduce the amount of subsidy needed for each loan with minor impact on the borrower. But there is a perception issue that must be resolved when these microlenders are faced with their funders and investors, and even their board and lending staff. So this report was developed as a sort of case study to demonstrate the need to raise prices to scale in a way that also demonstrates how they are able to stay mission-driven to serve this customer set. Part of this paper was an intent to say there is a reason we are doing this, we are doing this in a thoughtful way, this is part of what an essential scale strategy looks like.
What are your expectations for this session where you and members of the MIC will share findings from the report?
The session should be very engaging and we expect a lot of audience participation. A case we tried to make in this paper is that it is important to think about how business lending is different than consumer lending. People who see a 20% rate think about this in the context of what they pay on a mortgage, which is a much longer-term loan and a really different consumer product. They think about it in terms of what they might pay on a credit card, but most of us who work in the field as staff, funders, and investors aren't paying 20% on a credit card. Part of the issue is this. But business loans are different than consumer loans. This is an investment that has a return for the entrepreneur, and part of what you need to think about with that interest rate in terms of term of loan is how the capital is used and for what purpose, and what kind of return the capital is providing to the business owner.
What we are hoping to do in the panel is put out our take on the issue. Share key messages in the paper and engage in a dialog with others about what their reactions are. What we did find in the paper is there really are two different sets of practices out there. What we saw is that the average interest rate people report to us is quite low, with most microlenders ng around 7.5% on microenterprises. For the folks who have reached scale it is higher – microlenders that made more than 100 loans per year charged a median of 12.5%. To us that suggests they are higher because they are using that as an essential part of their ability to scale. So we want to point this practice out and have a discussion about that. And we want to engage in a discussion about how people are pricing their products, particularly small dollar microloans.
Who should attend this session?
In addition to microlenders we would love to see funders and investors join this session and engage with us on our findings. We are not saying everyone has to raise their prices. A small-scale organization is not trying to grow in the same manner and thus doesn't need to increase prices to grow your portfolio. But we do want funders and investors to understand why the ones who are interested in scale are pricing the way they are, and why they shouldn’t be putting price limits or reacting negatively to the pricing if it’s done with an eye to what the borrower can afford.
We hope this conversation helps everyone in the field have a better understanding of the strategies that exist for microlenders. And we really want to hear all perspectives.
Joyce is joined on the panel by Brad McConnell, Accion Chicago, Metta Smith, Accion New Mexico, and Galen Gondolfi, Justine PETERSEN. The session takes place Tuesday, 11AM.