KNOXVILLE, Tenn. — Making loans to startups is a risky business. But one credit union has introduced a new micro-loan program that it says leverages technology — and a small group of businesspeople — to increase the chance the new enterprise will succeed.
Called the Line12 Microfund, the effort from UT FCU has drawn comparisons to the ABC TV reality show "Shark Tank," because not only does the program provide capital, it also delivers business advice from local entrepreneurs.
"How do you improve the 70% failure rate of new businesses?" asked SVP and CLO Jonathan Patrick. "It's not just about the capital you advance, the owners of the new business need to get in front of smart people who have been in their shoes and can point them in the right direction in key areas, like accounting, where a lot of these startups mess up."
The credit union recently launched the program to fill a void in this city created by lenders not willing to take chances on new ventures. The program takes its name from line 12 of the Internal Revenue Service's 1040 tax form, which is for business income. Advertising claims the UT FCU will "pump up your line 12."
Patrick said what is unique about Line12, besides software that plays a key role in the loan-decision process, is that a five-person committee of local business people — including a tax attorney, entrepreneur and angel investor — evaluates whether the startup is viable.
"These are highly skilled businesspeople who have been on both sides of the table, either pitching a business or listening to people who are proposing one. They have very good insights into what a business needs beyond capital — does the business understand the market, does it have the right team and plan?" said Patrick, a former entrepreneur and commercial lender.
Patrick is not on the five-member committee, and the volunteer team is not employed by UT.
How Line12 Works
Potential borrowers go to the
The website's software program checks to make sure the borrower passes the first set of questions, and then delivers a second series of open-ended business questions, asking about the startup's business and marketing plans, and the opportunity, for example.
Those answers reach the panel, which then votes to send the borrower on to the program's next step or recommends to UT that the CU not do the deal. The credit union then makes the final decision.
Those who advance then answer a series of multiple choice questions about the startup, and the software evaluates the answers, delivering a final score for the business. "Borrowers who achieve a high enough score are then evaluated by the panel again," Patrick said.
If the team approves the business, the final step is to pitch the concept in front of the committee. If the group likes what they hear, they recommend to UT that the loan should be funded.
And just like "Shark Tank's" investors can be very discerning about how they advance capital, the Line12 program is designed to be very careful in its decision making. Line12 has received 12 applications since it was introduced in early March — six businesses were dropped out, three are in the early evaluation stage, and three are preparing to pitch to the panel.
"Line12 is all about making sure the business is well prepared to open its doors and be successful," said Patrick, who added that unlike Shark Tank, when a deal is turned down, the CU does not say, "I'm out."
"Instead, we show borrowers where there are holes in their plans and tell them to fix them and come back," explained Patrick.
When a loan is granted, committee members with skills that closely match the needs of the business provide mentoring, Patrick explained. "We will also offer ongoing mentoring, much of that through seminars."
Patrick and angel investor Eric Dobson, from local Angel Capital Group designed the software that drives the Line12 microsite. Patrick said the software does an excellent job of evaluating the opportunity because it not only is designed to look at the borrower from a lender's perspective, but also from an angel investor's point of view.
He noted that making loans to startups can be time intensive due to the amount of information gathering that is needed and discussions with the borrower, but Line12 helps streamline the process.
"The program is efficient," Patrick said. "You don't have to worry about deal flow. I have two to three people working on the business lending side and we are stretched thin. Without Line12, if we get hundreds of apps we won't have the time to read through every business plan, their projections... I need to quickly know where a business' strengths and weaknesses are."
The credit union has received several calls from CUs wanting to know more about the program. Patrick said UT hopes to make the program available to other credit unions.
UT expects to make more than $100,000 in micro loans this year, with most loans expected to be around $30,000. Deals below $50,000 are not considered member business loans. UT does not have an MBL cap, since it is low-income designated.
Patrick said the program is not in place to make money for the credit union, but instead is community outreach. "We want to build jobs here in this low-income area. Yes, this program will create jobs one to two at a time, but that's OK. This is getting the community headed in the right direction."
It also is good relationship building and PR for UT.
"We hope some of these small businesses grow into bigger companies and someday come to us for that million-dollar loan," said Patrick.
