LEADERSHIP CORNER
Loan fund director looks to human side of credit history
Interviewed by Dan Nakaso
Advertiser Staff Writer
 |
Title: Executive director
Organization: Hawai'i Community Loan Fund, a nonprofit that makes loans — $1.5 million this year — to microenterprises
Age: 57
High school: Phillips Exeter Academy, New Hampshire
College: University of California at Santa Barbara, B.A. fine arts; master of fine arts, UC Santa Barbara; MBA University of Hawai'i Executive Schoo
Breakthrough job: Working for the nonprofit Maui Economic Opportunity in the 1980s and getting an MBA at the same time
• • •
Q: Why would somebody be turned down for a loan through your organization?
A: We don't discriminate against anybody. It's not that we don't turn things down. If there's a credit history or a bankruptcy, even, we find out the circumstances. Very often there's a very human side to what happened. If we understand that and it makes sense, then we'll go forward. If it's blatant misuse of credit, then it's obvious that they're probably going to do it again.
Q: There are other nonprofits that deal with so-called high-risk loans. Where do you fit in with those other groups? How are you different?
A: We're the lender of last resort, absolutely. That customer coming from a bank, for us, is probably a very good customer. More and more we're getting bank referrals where the bank really likes this person and thinks they have a really good idea but there may be too much revolving debt. The banks' criteria is so strict that any one little thing can make it absolutely undoable. So we're meeting with line loan officers at their monthly meetings to tell them about us. They can refer to us, hopefully keep the account, and eventually that deal might come back to them, as opposed to a customer closing an account because they're ticked off. A lot of our loans are very grassroots, very low business skill level, require a high amount of T/A (technical assistance) from us. Very few loans get out of here without a technical assistance plan of some kind saying look, you're weak in this area and you agree in writing, along with your promissory note to pay us back, to have this accounting piece fixed in three months. Sometimes we'll lend them the money to actually get them the training they need. Or you agree to get this marketing piece completed in six months. We're very involved in everything but telling them what business to go into.
Q: What are the common reasons people and companies default these days?
A: Our default rates are low, considering who we are. They're around 4.9 (percent) but I expect our default rates to be around 10 percent by the end of the year. One loan can take you there. The reason is that because we're a training-led lending strategy, we tend to work with our borrowers for a long time, even after the loan starts to go bad. Very often it's worth it and turns it around. But it will keep our delinquency rate high for a while and our defaults remain low. If, like the banks, we cut them off after 90 days and say the loan is dead, we have to write it off, our delinquencies would drop substantially but our defaults would pop up a bit. We're criticized by both sides of the community development world. One is that if our defaults and delinquencies are too low, we're criticized for not pushing the envelope and doing our job (which is) to get out there and do these difficult loans. From the other side, we're criticized if our defaults and delinquencies are too high from investors who are looking at it from a different perspective.
Q: So what are the main reasons businesses are in default these days?
A: We did a survey after 9-11. Surprisingly, a lot of people weren't affected that badly. Some people were affected immediately and 100 percent for maybe three or four months. An asparagus grower on Kaua'i — his sales went to zero ... because he sold to high-end restaurants and their business disappeared for a while. So he paid us interest only for a few months. An 'ukulele builder sells in Waikiki and downtown, obviously their business went to zero for a while. A wedding business, business increased after 9-11. So we didn't see a huge trend downward. Personal (reasons), such as not having health insurance and all of a sudden something happens and the principal can't function anymore. In the management capacity area, a lot of our borrowers are not experienced ... long-time business managers. Often they've been doing it a little while or they're just starting out, so lots of things can affect them. Very often because of that we control the capital. We just don't fund the loan in full with one check. Very often we'll fund it directly to vendors or directly in increments as the business develops.
It's not Hawai'i's economy and it's not really that much what you hear about business regulation, the standard stuff you hear about it's so hard to do business in Hawai'i. (The businesses that got into trouble) had a great idea. Carrying out the idea was the problem — realizing that they have to show up every day ... (and) develop a cash flow that makes your numbers work.
Q: Are all of those reasons you listed for defaulting universal, whether it's a small startup or a larger business looking for a loan?
A: We've done some loans that are $250,000, $400,000. Their history is much more established and their ability to manage money and to manage capital is much more sophisticated. With them, it's much more marketing issues.
Q: Are you having problems raising money? Is it easy or difficult these days?
A: From 1998 to 2002 we got money every year from American Savings, Bank of Hawaii, Central Pacific Bank, Hawaii National Bank, City Bank, lots of banks. That was key for a startup loan fund with no track record. Since then, we've been really fortunate to raise additional capital through other foundations. We've gotten some really interesting donations. We got a $1 million award from the Department of Treasury last year which is a really big deal. We've been very fortunate, but the trick is in one or two or three years to develop a scale of about $6 (million) to $10 million and at a 10 (percent) to 14 percent interest rate, that will cover our operational cost. It may not cover a new product or a new service we want to do, but it gets into the 70 (percent) or 80 percent range of self-sufficiency. Interest or fees cover 70 (percent) or 80 percent of operating costs. It's a goal and a dream and we know other loan funds have achieved that but it's always going to be sort of an endless chase.
Is it hard this year? I think it's hard every year because every funder every year is looking for new stuff.
Q: So how do you get up to that $6 (million) to $10 million level in our economy?
A: You raise more capital and you deploy it faster. Increasing our volume through things like accessing bank loan officers and getting referrals that way. That's generating a substantial number of deals in the last two months. We're so inundated with requests. We've got two loan officers and myself and a huge pipeline of deals. We did 26 loans last year. We probably talked to over 300 people who inquired about a loan.
