Business Innovation Group (BIG)
College of Business Administration

Micro-lending program

Over several months Georgia Southern University’s Center for Entrepreneurial Learning and Leadership has been exploring the development of a micro-lending program; especially how such a program might work at a University.  The focus has been to establish a micro-lending fund for entrepreneurs (both student, graduate and local) at Georgia Southern University in Statesboro.  The concept is to provide small loans ($2,000-$15,000) to help establish businesses where the prospective entrepreneur does not have collateral and may not have a good credit rating.  The loans are designed to support links between entrepreneurs and the University, as well as, to be focused on distressed rural locations.

The Center has conducted research on micro-lending (micro-finance) programs that are linked to Universities and particularly entrepreneurship centers.  This research concluded:

  • In theory a University foundation can administer a fund from a legal and governance standpoint
  • A number of universities in the US have had micro-lending funds targeted at inner city entrepreneurs.
  • MBA entrepreneurship students are sometimes used to administer the fund, as part of their learning experience
  • Universities that have been successful have partnered with a local credit union to help administer the funds
  • Most funds are started with around $60,000, which is usually donations from alumni
  • At one University there was an equity seed capital fund and they found a greater need for small grants and no interest loans.  Once again money came from alumni donations.
  • Another US University tended to have micro grants for students, again funded by an endowed gift from a parent of a student.  The same university also has’ runway’ loans which are a bit larger (up to $25k), these are no interest loans which are tied to cash flow.  Once principle is repaid there is an automatic gift agreement, the university gets 1% of revenues until they sell the business and a commitment of 1% of the sale price of the business. 
  • A third university proposed contributions from alumni, students, parents and supporters but the idea of a $2 addition to student fees was not attractive.
  • Loan payments on principal and interest are usually recycled back into the fund
  • Any fund needs a clear philosophy for eligibility (e.g. geographic location of enterprise or just a student of particular institution – at what point after graduation is too late?)

A further study carried out on the administrative aspects of a micro-lending highlighted that a university would:

  • Need to consider fund collection and orchestration.  Key issues include:  Size and unit of loans, critical mass of funds, programming for growth of businesses and fund, loan placement practices, returns of loans and interest, growth and reuse of funds.
  • Need oversight procedures: advisory board, audits, approval mechanisms, recipient tracking and delinquency handling
  • Need processes: applications; review approval; documentation; repackaging; repayment collections; operational reviews.
  • Need repayment processing methods: software; adaptation; learning; loan setup; statements; payments; arrears notices; and, reports.
  • Need to consider confidentiality agreements for students working on due diligence
  • The default rate could be as high as 25%-35%

When we started to develop our own proposals for a fund we made the following conclusions.

  • The fund will need to be not-for-profit
  • Most institutions will have foundations that will allow them to govern such funds and there is evidence of these working in other parts of the US.
  • Partnering with a bank or a credit union is essential for the fund to be properly administered.
  • $40,000-$200,000 should be enough to start a fund; the source could be government grants or alumni gifts.
  • Students and local entrepreneurs will need small loans with low or no interest (typically $2,000-$15,000 at 5-10% interest)
  • It is possible to innovate by providing low or no interest loans tied to future gift agreements to the University.
  • The operational aspects of managing a micro-finance fund should not be under-estimated.  These include loan orchestration, oversight, application processes and repayment processing methods.  All of these suggest that we would need to partner with a bank or credit union.
  • The philosophy for the program would be both educational and practical.  Students would need to be involved in the decision making process, student and graduate entrepreneurs as well as local entrepreneurs would be the recipients and it would need to have a focus on distressed areas.

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