SMALL BUSINESSES; Cap is raised on feds' loans in region

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Sacramento Bee (California)
By: Darrell Smith
October 31, 2010

ENTREPRENEURS HAVE ALTERNATE SOURCE AS PRIVATE LENDERS BALK

Microloans -- small, short-term loans to small businesses -- are getting a federal cash infusion that will give firms more access to the loans.

The federal government has pumped more money into the U.S. Small Business Administration's microloan program -- some $75 million from Congress in the last 18 months, said Jim O'Neal, the SBA's Sacramento director -- and has boosted the amount firms can borrow from $35,000 to $50,000. The loans can be used for working capital or to buy inventory, supplies and equipment.

"We have businesses that were startups but are now established businesses. They need to hire and buy pieces of equipment," O'Neal said. "They're looking for another funding source and now it's available to a lot more people."

At Ginger Elizabeth on L Street in Sacramento's midtown last week, display cases were filled with croquant, brulee, rocher and macarons holding exotic flavors like lychee elderflower and grapefruit-fennel pollen caramel.

The heady aroma of dark chocolate hung in the air of the tiny boutique as a white-bloused cook prepared the bittersweet chocolate mousse that would form the filling of its specialty gianduja cakes.

A microloan in summer 2007 provided the boost Ginger Elizabeth and husband Tom Hahn needed to move from being a wholesaler to retail chocolatier. They used it to buy equipment to craft the confections they sell and to develop a marketing plan to rebrand their image and reach a wider clientele.

"For us to do chocolate on a professional level, there was certain equipment we needed to buy," Hahn said Tuesday. The microloan "allowed us to bring the equipment into the shop; it was crucial in rebranding. Those were the biggest things it allowed us to do. It's hard to do unless you have your hands on money."

Microloans are primarily known for their role in helping businesses grow in the developing world, where an infusion of a few hundred dollars or even less can lift a budding entrepreneur's fortunes.

They're becoming a staple in the United States, too, as small businesses have turned to microloans during the downturn for help to open their doors, stay afloat or grow.

But in America, where startup, equipment and other costs are far higher, microloan amounts are usually measured in the tens of thousands of dollars. The average is about $13,000, according to the SBA, and some are much higher.

"Banks are not making loans under $100,000 anymore. When businesses are past their startup phase, there's a gap," said Claudia Viek, executive director of the California Association for Micro Enterprise Opportunity, or CAMEO. "If you need to finance a big contract or pay for finances and overhead, being able to get $50,000 is a big help."

The San Francisco-based nonprofit group represents more than 140 microenterprise development organizations and microlenders statewide. The association saw demand for microloans rise last year. In its 2009 annual report, CAMEO reported its member microlenders saw "a significant uptick in demand" for the smaller loans.

Locally, intermediaries like Auburn-based microlender Sierra Economic Development Corp., or SEDCorp, provide the loans through the SBA. The loans are not guaranteed by SBA, but SEDCorp borrows money from the agency, then makes loans to clients locally.

Raising the microloan ceiling to $50,000 not only nods to the economic realities of inflation, startup and operating costs, said Brent Smith, SEDCorp's executive director, but bridges the cash gap for numerous businesses that cannot qualify for larger loans.

"We're already seeing loans going to help some that are in need," said Smith, whose SEDCorp serves a mix of rural and urban businesses in an eight-county region where half the clients are Sacramento-area firms.

"This move by the SBA is very important," he continued. "This change could make all the difference to that business owner who was trapped in the middle" between the previous ceiling and what they actually needed.

Today's small-business owners have outlasted the worst of the recession: They've managed expenses and payroll, looked to what they can preserve and what they can live without.

They're the survivors. But the capital crucial to their continued survival and potential growth remains elusive, as still-leery lenders hold tight to their cash.

Overall SBA lending plunged nearly two-thirds from 2007 to 2009, as the recession discouraged would-be entrepreneurs. But as banks continue to tighten lending, the demand for the smaller loans is growing, Viek said.

Data were not immediately available, but the SBA's O'Neal estimated that small-business inquiries to his office about microloans have increased nearly a third from the same time last year.

The money is in place, but "we desperately need more lenders," said O'Neal, who met Tuesday with state officials and others about growing the ranks.

Auburn's SEDCorp is the only SBA-certified microlender in the region, O'Neal said. Since first issuing microloans in 1999, SEDCorp has issued 122 loans totaling more than $4 million, SEDCorp officials reported.

Viek of the nonprofit CAMEO, said the microloans will not only aid those main street businesses struggling to survive, but can also pave the way for new hires and for jobless workers to join the world of entrepreneurship.

"There are unemployed people who want to start their own businesses," Viek said. "There is a large, untapped pool of entrepreneurs who can bring innovation into the marketplace."

Call The Bee's Darrell Smith, (916) 321-1040.

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