The Wall Street Journal
By: April H. Lee
August 11, 2010
Like many small businesses caught in the worst economic crisis since the Great Depression, Tri-State Biodiesel was struggling to find capital last year in the middle of a credit crunch.
The Bronx, N.Y., company, which converts cooking-oil refuse from restaurants around New York City into fuel that it then sells, was in dire need of an equipment upgrade.
"Banks weren't lending at all," said Brent Baker, founder and chief executive. Baker said he went to three major commercial banks that had financed the company in the past. "Once the crisis hit, applications were suddenly more complicated and lengthy, and they all came back giving us all these euphemisms for 'no.'"
In the end, Baker got a $50,000, three-year loan at a reasonable rate from Boc Capital, a lender that received $750,000 from the federal government thanks to the 2009 stimulus bill last year, to help small businesses just like Tri-State Biodiesel.
"The loan increased our profitability and put us in a position where we could expand," Baker said, adding that his company hired 10 more workers. "It shows how a relatively small amount of credit can be such a huge advantage, and we really did create jobs."
When President Barack Obama signed the American Recovery and Reinvestment Act into law in February 2009 to create jobs and promote spending, the law included $56.1 million for microloans for small businesses, to be doled out through the Small Business Administration through September.
While some critics complain about the government's economic stimulus efforts, some lenders and borrowers say the stimulus spending that focused on helping small businesses is working.
Targeted toward start-up, newly-established, or growing small businesses, the microloans are short-term loans up to $35,000 each for working capital or inventory and equipment purchases. The intermediary lenders who distribute the loans can choose to lend more than that limit.
The idea of microlending is more typically associated with loans in amounts as little as $25, disbursed to impoverished people in developing countries, ideally helping them to generate their own income to climb out of poverty.
But more recently, microcredit has become a mainstream practice in the U.S., and even though the average SBA microloan size is $13,000, the SBA's program shares a similar mission as traditional microloan programs.
"While the microloan program is open to all entrepreneurs, the program especially supports underserved markets," said Pravina Raghavan, director of the SBA's New York District Office. This includes borrowers with little or no credit history, low-income borrowers, and women and minority entrepreneurs who generally don't qualify for conventional loans or larger SBA guaranteed loans, Raghavan said.
More Borrowers Tap Microlenders
SBA microloans are disbursed through specially-designated non-profit intermediary lenders across the country -- a list of which can be found on the SBA website -- that pay the SBA interest of about 1%.
The intermediaries themselves can pool funds together to lend as much as $50,000, and interest rates for the small-business borrowers, which are usually no more than 10%, are individually negotiated with the intermediary lenders.
"We were ready to expand our lending and the stimulus enabled the next round of lending to come in, and at much a lower interest rate that's near zero," said Nancy Carin, executive director of Boc Capital, one of 20 intermediaries servicing the New York area.
For Boc Capital, the stimulus doubled the microlender's capital base while interest rates for the loans are as much as five percentage points lower. At the same time, demand rose, Carin said.
"We've been seeing some borrowers that in the past would've gotten financing though traditional banks," she said. "Even successful businesses would see their sales fall by 30% and so they'd come to us."
Banks were also in trouble after the crisis, adding to small business owners' woes. In 2008, FDIC-insured banks endured losses of $12.4 billion, compared to a profit of $101.6 billion a year earlier, as 26 banks failed. Another 152 banks failed in 2009.
Faced with the deterioration of their balance sheets, banks become more wary of risk. They tightened credit lines and started refusing to make smaller, riskier loans.
Such was the post-crisis fallout that Accion USA, a national microlender that also distributes SBA funding, has seen a 20% increase in applicants nationwide this year compared to 2009, said Gina Harman, chief executive of Accion.
Nationwide, since the Recovery Act was signed, the average total dollar amount of microloans made each month has grown to $3.1 million, up from $2.5 million in 2008, said the SBA's Raghavan. SBA intermediaries made 2,717 loans in 2009. In the New York City area alone, the SBA's lending volume increased by 70% in a year.
Even with the dramatic rise in loans, microlenders such as Accion and Boc said they have kept repayment rates above 90%. Similarly, delinquency rates for the SBA microloan program have steadily fallen from 5.37% in 2007 to 4.73% this year.
Tips For Small-Business Owners
Raghavan said small-business owners looking to borrow money should research the 20 intermediaries as each has different policies.
The lending process is "a very personal and intensive process that varies by the business and the nature of the request," Accion's Harman said.
Microlenders such as Accion even provide technical assistance -- for which the stimulus allocated an additional $24 million -- to help small-business owners prepare to obtain a loan.
Smaller SBA microlenders such as the Business Center for New Americans, which focuses on refugees and immigrants, frequently work with those who have no credit at all to help them get loans.
Up to 70% of BCNA's borrowers are repeat borrowers, said Yanki Tshering, the center's director, adding that the microlender is on track to make 200 loans this year compared to 112 in 2008 before the stimulus program.
Working first with a small-business service center to put documents in order speeds up the process considerably, said Accion's Harman. The process of clearing up credit reports can delay loans for as much as six months to a year. But once loan officers are able to build a profile and complete site visits, a loan decision can be made within a week and the loan can be disbursed immediately, she said.
"It was an easy process. The application was only a page or two long," said Ted Cooper, who owns Fresh Look Remodeling, a New York-based energy-audit business.
Struggling with working capital needs and faced with laying off his six workers, Cooper applied to a few big banks, one of which asked for $15,000 worth of collateral.
"If I had that, I wouldn't have needed to borrow it," Cooper said. At Accion, he said, "I didn't have to put up my firstborn."
Cooper received a $10,000, two-year loan from Accion's Green Loan program, which offers unsecured loans to green businesses with SBA funding at a reduced 9% interest rate. "With the credit score I was working with, the rate was fantastic," Cooper said.
Accion has a few guidelines, which includes a credit score above 575, but Harman said that such requirements aren't set in stone.
"They are guidelines, but the key determinant is if the business is able to handle additional payments without crippling their business," Harman said.
Small Group Of Borrowers Served
Still, according to a Congressional Research Service in 2010, only about 1% of small businesses are helped by these loans, and a separate survey showed small-business owners consistently place financing issues near the bottom of their most pressing concerns.
Just 5% of small-business owners said obtaining loans was a critical problem, according to a National Federation of Independent Business survey in early 2008 of 3,530 small-business owners.
But small businesses were simply more wary of taking on liabilities in turbulent times, said SBA's Raghavan. According to an SBA study, more than half of the 736,000 jobs lost in the first two quarters of 2008 were lost in small firms.
"Small businesses that actually need credit have to rely on SBA support," Raghavan said. "And when small businesses need credit, they really need it."
"The important message is that we're here," Accion's Harman said. "We're making loans, and we encourage businesses not to give up hope if they have gone looking for capital."