The Chicago Tribune
By: April H. Lee
September 6, 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 company, which converts used cooking oil 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 in federal stimulus funds last year to help small businesses such as 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 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 to small businesses, to be doled out through the Small Business Administration through September.
Though some critics complain about the government's economic stimulus efforts, some lenders and borrowers say the stimulus money for small businesses is working.
Targeted toward startup, 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 of as little as $25 to poor people in developing countries to help them generate their own income to climb out of poverty.
But more recently, microcredit has become a mainstream practice in the U.S. Even though the average Small Business Administration microloan is $13,000, the agency's program has a mission similar to traditional microloan programs.
"While the microloan program is open to all entrepreneurs, the program especially supports underserved markets," said Pravina Raghavan, director of the Small Business Administration's New York district office.
This includes borrowers with little or no credit history, low-income borrowers, and female and minority entrepreneurs who generally don't qualify for conventional loans or larger Small Business Administration-guaranteed loans, Raghavan said.
Small Business Administration microloans are disbursed through specially designated nonprofit intermediary lenders across the country -- a list of which can be found on the agency's Web site -- that pay the Small Business Administration interest of about 1 percent.
The intermediaries can pool funds to lend as much as $50,000, and interest rates for the small-business borrowers, which are usually no more than 10 percent, 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 a much lower interest rate that's near zero," said Nancy Carin, executive director of Boc Capital.
For Boc Capital, the stimulus doubled the microlender's capital base while interest rates for the loans are as much as 5 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 through traditional banks," she said. "Even successful businesses would see their sales fall by 30 percent, 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 with profits of $101.6 billion a year earlier, as 26 banks failed. An additional 152 banks failed in 2009.
As their balance sheets deteriorated, banks became more wary of risk. They tightened credit lines and started refusing to make smaller, riskier loans.
As a result, Accion USA, a national microlender that also distributes Small Business Administration funding, has seen a 20 percent increase in applicants nationwide this year from 2009, said Gina Harman, chief executive of Accion.
Nationwide, since the stimulus act was signed, the average monthly total of microloans has grown to $3.1 million, up from $2.5 million in 2008, Raghavan said. Small Business Administration intermediaries made 2,717 loans in 2009.
Even with the rise in loans, microlenders such as Accion and Boc said they have kept repayment rates above 90 percent. Similarly, delinquency rates for the Small Business Administration microloan program have steadily fallen from 5.37 percent in 2007 to 4.73 percent this year.
Still, only about 1 percent of small businesses are helped by these loans, according to a Congressional Research Service survey in 2010. A separate survey showed small-business owners consistently place financing issues near the bottom of their most pressing concerns.
Just 5 percent 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.
That could be a reflection of small businesses simply being more wary of taking on liabilities in turbulent times, said Raghavan. More than half of the 736,000 jobs lost in the first two quarters of 2008 were lost in small firms, the Small Business Administration said.
"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," Harman said. "We're making loans, and we encourage businesses not to give up hope if they have gone looking for capital."