Innovations Financial Bets Big On Small Business Lending

This article is part of Callahan & Associates’ “CDFI Grants In Action,” a limited editorial series that showcases how credit unions leverage CDFI funding to advance their mission and deliver measurable impact for members. To learn how CDFI certification can change lives and unlock opportunities at your credit union, visit CU Strategic Planning, A Callahan Company.

CDFI grant funding has helped Innovations Financial Federal Credit Union ($651.9M, Panama City Beach, FL) expand access to capital for small businesses in and around the Florida Panhandle.

A pre-COVID grant helped the credit union launch a microlending program that provides up to $50,000 to small businesses in its market and continues to make a difference in the region.

The Problem

The bank landscape in Florida has substantially shrunk since the Great Recession. Many small and mid-size local banks have closed their doors or merged with larger entities, leaving a void in the commercial lending space.

Hurricane Michael in 2018 exacerbated the problem when it decimated the Panama City area and dealt a death blow to local businesses across the region.

The Solution

With CDFI grant funding, Innovations Financial implemented a microlending program for small businesses and entrepreneurs starting new businesses. The credit union made up to $25,000 in unsecured funds available and up to $50,000 available for loans secured by homes, equipment, or real estate. Both loans were available to borrowers with a minimum 650 credit score and business plan proforma or documented LLC.

“None of these are loans you would make under traditional financing,” says David Powell, chief operating officer. “Because of the small dollar amount, it truly is the mom and pop shops. It’s the guy working at a company and doing a side gig who wants go out and do his own thing. It’s the husband and wife who want to start a side gig.”

The credit union can offer a term loan or a line of credit for the $25,000 option as long as borrowers meet the minimum 650 credit score and other stipulations. It prices those loans between 10.5% and 14.5%. The collateral-secured loans it prices at market rate.

Loan applications have been evenly split between new and existing members, and some applicants have told loan officers they were referred by their bank because the institution couldn’t make the loan.

The Results

Although the national economic picture has been rocky, Powell says Florida’s economy behaves somewhat differently because of the heavy influence of tourism and the military.

“If you boil it down to the Panhandle, we’re even more insulated than the rest of the state,” the COO says. “Then boil it down to Bay County and the surrounding counties, and we’re even further insulated.”

According to Powell, steady economic growth in the past decade spurred on by people and businesses moving into the region has helped fuel the microlending program. The credit union has made more than $8 million in microloans since 2018, and with a default rate of just 6%, the program has been “wildly successful.”

“There’s hardly anyplace small businesses can go to get money to start up, so we were absolutely fulfilling that need in all the areas we serve,” Powell says.

A partnership with the Small Business Development Center, offered through the University of West Florida, has helped drive applications. Many startups and small businesses work with the center on business planning, and the center frequently refers those entrepreneurs to the credit union.

And even when some borrowers have gone out of business, they’ve continued to pay back the credit union, says Powell.

“It’s been pleasantly surprising to see the level of commitment,” he says. “I think what saved us is that 650 credit score cutoff, which I would allege tells someone’s character to a good degree. Even if they go out of business, they understand they’re on the hook and don’t want their credit to suffer. And because the loans are generally small, they can generally afford to pay it.”

Lessons Learned

A proactive collections process has contributed to the program’s success. Rather than waiting until the end of a 15-day grace period to reach out as the credit union does on normal business loans, credit union representatives call these borrowers to check in within a few days of a payment’s due date.

“These small business loans are generally not sophisticated borrows,” Powell says. “Lots of times they just forget to make the payment and need a reminder. We’ve found it to be a best practice to start collections with these microloans very early in the past-due process. We don’t want to let them get behind because once they’re behind they can’t catch up.”

The partnership with the Small Business Development Center has been crucial to the program’s success, Powell says, and he advises other credit unions to investigate similar offerings in their own markets. But even with that help, credit unions need to be sure they understand applicants’ business plans as well.

“Be sure you understand how to manage and control that risk,” he says. “How to read people’s credit reports, how to understand what they’re telling you in the business plan, how to collect on the back end, and so forth.”