Carolina Foothills FCU offers a suite a products, including microloans, for small businesses.
The South Carolina cooperative has already fielded calls from small-business owners looking for guidance as the coronavirus pandemic unfolds. The credit union has rolled out extensions on consumer loans and is evaluating business loans on a case-by-case basis.
Carolina Foothills Federal Credit Union ($120.2M, Spartanburg, SC) offers a lineup of small-business products that includes four checking options, 11 loan programs, and a rewards credit card. In late 2018, it also started offering microloans and in-house coaching to small businesses.
Today, as the coronavirus pandemic unfolds, Carolina Foothills is fielding inquiries from small-business owners who are voicing their concerns or looking to benefit from interest rate cuts. Scott Whelchel, microlending officer at the credit union, has started reaching out to check in with every business borrower.
“Some will be brief,” Whelchel says. “Others will have concerns. The borrowers in childcare and food service are the two groups I suspect will have the greatest concerns.”
Listen. Assess. Solve.
In response to the disruption caused by the coronavirus, Carolina Foothills has already rolled out extensions on its consumer-based loans, which the credit union services on its own core system. Business loans, however, are a different animal that the credit union cannot address with a one-size-fits-all solution. So, the cooperative plans to make modification decisions on a case-by-case basis while it continues working with its local business owners.
CU QUICK FACTS
Carolina Foothills FCU
HQ: Spartanburg, SC
Data as of 12.31.19
12-MO SHARE GROWTH: 6.9%
12-MO LOAN GROWTH: 5.5%
“We’re listening first, assessing the need, and then finding a solution,” Whelchel says. “During these uncertain times, it’s difficult to determine if we’re looking at a 30-day issue, a 60-day issue, or more. The trick is to make the solution work, to the benefit of the member, without knowing the full problem.”
Likewise, Whelchel advises credit unions to listen first, assess the need, and then look at options. Also, don’t underestimate the stress and emotions involved when a business owner is looking at a significant loss of revenue — possibly a total shut down — perishable inventory, or both.
“If this situation is scary to the credit union’s staff, it is exponentially scarier to the small-business owner,” he says. “It’s not going to be easy, but we want these small businesses around for the long term because their customers want them around.”
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Whelchel joined the cooperative in July 2018 after spending more than a dozen years with the local small-business development center in nearby Greenville, SC.
During his tenure with the SBDC, Whelchel’s days were filled with small-business consulting, including coaching, business planning, workshops, and more.
“Basically, I did everything but the lending,” Whelchel says.
Scott Whelchel, Microlending Officer, Carolina Foothills FCU
Through his work with area small businesses, Whelchel learned about common pain points in the lending process. In terms of funding, there was a particularly frustrating gap in the $5,000 to $50,000 range that most banks — which generally look to underwrite commercial mortgages or SBA loans of $250,000 or more — had no interest in filling.
When Carolina Foothills’ vice president of community engagement initially reached out to Whelchel for help, he knew the organization but didn’t realize he was fielding a job opportunity.
“If someone asks for help, my inclination is to jump in and offer it,” Whelchel says.
After learning about the cooperative’s CDFI status and its initiatives to serve the underserved business market through financing, education, and coaching, Whelchel decided to seize the opportunity to switch to the financing side.
The Need For Microloans
In the world of small-business lending, there is a need for initial funding in the $5,000 to $25,000 range to cover equipment or expenses that are too large for a credit card but not worth taking out a HELOC. As he worked with local entrepreneurs, Whelchel also discovered they were looking for options that would help them build credit in the name of their businesses without tying up their personal borrowing capacity.
“If a small-business owner wants to buy a home and has to finance commercial vehicles or other business equipment personally, they might find their family’s purchasing power compromised by business borrowings,” Whelchel says.
The second wave of Carolina Foothills’ CDFI initiative encompassed startups, small and emerging businesses, and other operating entities, some of which already used the credit union’s business accounts or whose owners were members borrowing on the consumer side.
Carolina Foothills defines microloan candidates as companies with less than $500,000 to $1 million in revenue and five or fewer employees. Approximately half of these businesses have been based in a home. Although Whelchel acknowledges microloans require a lot of hand-holding, the credit union has created a successful program with only a single delinquency.
Partnership With Spartanburg
The City of Spartanburg’s Amplify program, formerly known as Emerge, provides aspiring entrepreneurs with access to training, coaching, and support services.
The program includes a 10- to 12-week business training and development course that guides participants through the stages of starting or expanding a business. Whelchel is one of the business experts who shares advice and guidance with program participants, and by the course’s conclusion, participants are lender-ready.
If this situation is scary to the credit union’s staff, it is exponentially scarier to the small-business owner.
In regard to funding, Spartanburg provides loan loss reserve grants to help guarantee the microloans for each cohort.
“The initial grant was $25,000,” Whelchel says. “We leveraged those reserve funds to make approximately $125,000 in loans during the first 15-months.”
But make no mistake, this is not free money for business owners. The credit union requires a personal guarantee and makes it clear there is every expectation of repayment for these microloans by the end of the two- to four-year term.
“If there’s not a plan or if the math doesn’t make sense, we’re not going to fund that loan,” Whelchel says.
And although Carolina Foothills recognizes the need to assess every situation, the credit union also requires a substantial investment by the entrepreneur. This might include cash and sweat equity in business planning and research to ensure the business is set up for success.
Coaching For Underwriting
The underwriting process for microloans is less about speed and more about making the loans possible for members who don’t have other options. Microloans sometimes require more research and the business owner might need to build and defend detailed projections for the next 12 to 24 months. That’s when strong partnership between potential borrower and lender are important.
“I’m there as a coach,” Whelchel says. “My job is to help borrowers understand and work through things until the loan is ready to hand over to the committee for approval.”
A credit union member since his teen years, Whelchel has learned a lot about the industry as a business lender. The fact approximately one-third of his projects are referred by local banks that won’t consider loans less than $20,000 underscores the important community need Carolina Foothills is filling — namely that it’s protecting startups from seemingly easy online access to capital that often comes at incredibly high interest rates.
Even other local institutions or in-house financing from equipment manufacturers might offer much higher rates to small-business owners that are not A or A+ borrowers. For example, a childcare center might be able to finance a passenger van for 5% APR through the credit union compared to 14% APR elsewhere. That makes a huge difference.
It’s still too early to fully evaluate the performance of the microloan program at Carolina Foothills, but Whelchel reports lending requests in the past 12 months have been 60% higher than the cooperative expected. And with only a single delinquency to date, the microloans are off to a strong start.
Local Partnerships For Long-Term Impact
Whelchel encourages other credit unions to looks closely at existing business resources within their own communities. Local SBDCs and other organizations might provide coaching or have access to business analytics, but they are not lenders. That’s where credit unions can play a role and fill the funding gap.
And because the CDFI generally overlaps market areas, Whelchel also advises credit unions to share referrals.
“Don’t be afraid to network with the bank community or other credit unions,” the lending officer says. “We share members with other local credit unions that don’t offer business accounts or have other limitations. We also make referrals when we have higher requests in a month and can’t do anymore of a certain type of loan.”
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