Corporate Members and Business Lending

Rhidian Morgan

The Social Investment Business

Lending to small businessOpportunity or threat?

• Confidence – very low• Certain sectors struggling more• Project Merlin• For most SMEs the door is shut – especially for small

businesses and start ups

Current Climate

• Business plan - limitations• Management interview - test assertions/assumptions• Financial analysis - forecasts and historic• Due diligence - market/competition/product• Recommendation• Conditions - covenants• Perfecting security

Investment Appraisal Process

• Poor marketing• Cash flow problems• Poor business planning• Lack of finance• Failure to embrace new technologies and new developments• Poor choice of location• Poor management• Poor human resource relations• Lack of clear objectives

Key reasons for business failure

Source: Office of Advocacy of the U.S. Small Business Administration

Business failure rates

42%

• The trouble of lending to business is its so damned risky!

Risk

The average loan portfolio in Wales* = £400,000

The average bad debt stands at 5%

Your exposure is £20,000

* Excludes Cardiff, N Wales & Save-Easy

What impact could this have?

If you were to lend £400,000 to business (and you knew what you were doing)

Your exposure could be as high as £123,000

Standard CU Lending Business Lending (unsecured)

• Credit unions are able to choose to offer membership to unincorporated associations and corporate bodies such as companies, partnerships and social enterprises.

• Non-individuals can only make up a maximum of 10% of a credit union’s total membership hold a maximum of 25% of shares in the credit union and be granted a maximum of 10% of loans

What will the LRO allow us to do?

Still think it’s too risky to lend to SMEs?

There are people out there lending to businesses ....

How are they doing it?

• The Father of Micro-finance: Mohammed Yunus

Micro-finance

• Started in Bangladesh providing microcredit to the impoverished without requiring collateral

• Based on the idea that the poor have skills that are under-utilized• A distinctive feature of the bank's credit program is that the

overwhelming majority (98%) of its borrowers are women.• A group-based credit approach is applied which utilizes the peer-

pressure within the group• By 2008 Grameen had invested $7.6 billion

Micro-finance: Grameen Bank

• Each borrower must belong to a five-member group• The group is not required to give any guarantee for a loan to its

member• Repayment responsibility solely rests on the individual borrower• The group oversee that everyone behaves in a responsible way and

none gets into a repayment problem• Grameen's policy is not to extend further credit to a group in which a

member defaults

Micro-finance: How solitary lending works

• Access• Flexibility• Simplicity• Honesty• Respect • Personal Relationship

Price is not the driver

• Within a year (of starting), Wonga had issued 100,000 loans, worth £20 million, earning about £15 million by charging interest at an eye-watering headline rate.

• Exploitation or Convenience?

Price is not the driver

Case Study

Fair Finance

London

Fair Finance: Isn’t it time you got a better deal?

• CDFI operating within specific London Boroughs• Very similar in approach to Moneyline Cymru• Only provide personal & business loans and advice• Borrow the majority of their money through commercial

sources, i.e. banks

Fair Finance

• Maximum £10,000 (minimum £1k)• Average investment £3,500• Interest rates between 19% - 20% (39%-59% personal

borrowing)• Last year made 71 loans to a value of £250,000• Conversion rate 20%• Failure rate upwards of 30%• Bad debt 10%

Fair Finance: Loan characteristics

• £3,500  Loan over 36 months• Admin fee £120• Total Interest payable £999.00• Fixed Interest Rate 19%• Total Repayment £4618.80• They make £1,118.80 on this transaction

Fair Finance: Representative business loan

• Based on 71 loans and an average income of £1,119• Total earnings over 3 years = £79,449, or• £26,000 per annum, before• Cost of capital• Bad debt• Operational costs• £1m of lending might generate something like £318k

over 3 years

Fair Finance: Income generation

Case Study

Finance Wales

Finance Wales: Micro-business Loan Fund

Size of Fund £ 6 million (minimum sub-funds of £1m to be allocated subject to investments made)

Fund Product LoansGeographical Coverage Pan-Wales

Sector All Size of Loans Offered £1,000- £20,000

Number of Investments

300-600

Repayment profile 5 year investment period followed by 5 year realisation period

Default rates* 20%

Finance Wales: Micro-business Loan Fund

Stage DateIssue contract notice and PQQ 12 June 2012Final date for PSPs to raise questions 19 July 2012Final date for PSPs to return PQQ 25 July 2012 (12pm)PQQ Evaluation Panel carry out PQQ scoring 26 July – 3 August 2012

Bidder consultation prior to issue of ITT 6 August – 10 August 2012 Invitations to Tender will be issued to successful suppliers and unsuccessful PSPs notified. Debriefs given on request.

17 August 2012

Final date for PSPs to raise questions on ITT 17 October 2012

Return date for final tenders 19 October 2012

Finance Wales: Micro-business Loan Fund

ITT evaluation and scoring 22 – 26 October 2012

Presentations may be held 29 October – 2 November 2012

Intention to Award notification letters issued electronically and start of Standstill period

7 November 2012

End of Standstill period 21 November 2012

Contract award 23 November

Finalise and sign contracts November 2012

Service commencement date December 2012

• Do nothing• Individual bid• Consortium bid• What can we do to help facilitate the process?

The way forward?

Thank you

Any questions?

Contact details

www.thesocialinvestmentbusiness.org

[email protected]

Tel: 0191 261 5200

Rhidian Morgan

[email protected]

Tel: 02920 786453