Seventy-one new small businesses have been built using microenterprise loans supplied by National Australia Bank (NAB) in a one-year pilot program launched in March 2007. The loans were provided to people with sound business plans but no access to affordable business credit from mainstream lenders, due to a lack of assets or high level of existing debt, and who were ineligible for a standard NAB business loan.
Ranging between $500 and $20,000, the loans were issued at a 9.95 per cent fixed rate and provided in Dandenong in Victoria, western Sydney and in Acacia Ridge, south-west of Brisbane. NAB committed $18 million towards the pilot and for a further two years. The loans were issued to a roughly even amount of men and women, typically in their mid-thirties, and were an average size of $15,000, a NAB report on the pilot states. Most of the loans were used to buy equipment and for marketing purposes.
Applicants were required to attend business literacy training and submit a business plan in order to qualify for loans. If successful, they undertook a further 12 months of business mentoring. NAB drew on existing providers of business literacy and mentoring in communities where they distributed the loans, rather than providing these resources itself. By using these providers, the cost of the pilot was much lower than expected. NAB had predicted the program would cost $0.72 for each dollar lent; the eventual cost was $0.15 in each dollar. The use of existing business literacy programs alone saved the bank $0.30 in each dollar.
NAB found that loan recipients that completed business literacy training and developed business plans were successful: “the practice introduces a process of natural selection, with only those serious and committed enough to complete business training offered a loan,” the report states. The pilot also found that business mentors were most effective if engaged by clients before they seek a loan. Aside from imparting business skills, they also act as a third party to help the bank manage any arrears (where clients miss the first repayment date, 90 days after the first drawdown) as they arise.
The program intends to deliver 250 loans by March next year and reduce defaults (where repayments are up to 120 days late) to less than 10 per cent. The bank also wants to introduce a special product for indigenous people. But the core aim remains that people using these loans succeed, ending their “financial exclusion”.