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Small Businesses Get New Loan Source From SBA Pilot Program

August 23rd, 2011 :: Maria Valdez Haubrich

By Maria Valdez Haubrich

As the economy bumps along on the road to recovery, one fact holds true: Small businesses are still having a tough time getting financing to grow. That’s especially so for businesses in areas that are hard-hit by the lingering effects of the recession or regions that have never offered many capital sources.

Now there’s some help for those businesses in the form of a new financing option—the SBA’s new Intermediary Lending Pilot (ILP) Program, which has recently funded 20 community organizations authorized to start making loans up to $200,000 to qualifying small businesses.

Part of the Small Business Jobs Act of 2010, this three-year pilot program provides direct loans to eligible nonprofit intermediaries so they can make loans to small businesses in areas suffering from a lack of credit due to poor economic conditions or changes in the financial market.

The goal of the program is to address gaps in the credit market including:

Lack of availability of commercial loans of $200,000 or less
Borrowers who have declining collateral values or lower credit scores due to the economic downturn
Commercial lenders such as banks having tighter underwriting standards, greater concerns about risk and less money to lend
Certain populations in economically distressed areas remaining underserved

ILP loans can be used for working capital, real estate, or to buy materials, supplies and equipment. The loans are made through nonprofit intermediaries, such as Community Development Financial Institutions (CDFIs), Community Development Corporations and SBA Certified Development Companies (CDCs).

Although 20 have been chosen for this year, the ILP is seeking 20 more to join the pilot program for 2012. So far, the ILP pilot has funding to make loans in 2011 and 2012, but if funds are approved for an additional year, 20 more intermediaries will be chosen to make loans in 2013.

Visit the SBA website for a list of the first 20 ILP lenders authorized to make loans in 2011. For more information on applying for ILP and other SBA loans, contact your nearest SBA District Office, which you can find at http://www.sba.gov/about-offices-list/2.

Image by Flickr user Cliff 1066 (Creative Commons)

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Tags: SBA loans, small business lending
Posted in Capital Access, Raising Capital, Small Business, small business, Uncategorized | 1 Comment »

Small Business Access to Capital: What’s the Problem?

July 7th, 2011 :: Karen Axelton

By Karen Axelton

In late June the House Committee on Small Business held a hearing to explore the state of small business financing. The Policy Dialogue on Entrepreneurship blog reported on the hearing:

Delivering a summary of his report on the State of Small Business Access to Capital, Treasury Secretary Timothy Geithner noted that lots of small businesses were concentrated in areas related to real estate and construction—the industries hardest hit by the financial crisis.

Geithner reiterated how the Small Business Jobs Act of 2010 aimed to provide small business with more access to capital through:

modifications to the SBA Capital Access Programs
a State Small Business Credit Initiative
creation of the Small Business Lending Fund (SBLF)

The two latter initiatives were aimed at improving the amount of capital available to community banks and encouraging them to lend to small business. However, much of the hearing focused on why these efforts don’t seem to have led to results and why small businesses are still struggling to get capital they need. The Committee chair, in particular, noted that there’s a gap between banks having plenty of money to lend, but small businesses saying that they still can’t get money from banks.

Responding to the questions, Secretary Geithner said that the Obama Administration is undertaking a five-point strategic plan to help small businesses expand and invest:

Providing significant tax relief targeted to small businesses
Helping small businesses obtain access to working capital on more favorable terms
Regulatory reform, which includes a government-wide review to address regulations that hinder small businesses
Increasing federal contracting options for small businesses and improving their access to procurement opportunities
Programs to help small businesses access foreign markets and compete overseas

Will these efforts help? It remains to be seen.

Image by Flickr user Cliff 1066 (Creative Commons)

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Tags: Capital Access, small business lending, small business loans
Posted in Capital Access, Raising Capital, Small Business, small business | No Comments »

Do You Know the Six C’s of Credit?

May 26th, 2011 :: Maria Valdez Haubrich

By Maria Valdez Haubrich

Are you trying to get a loan or line of credit for your small business? Then you need to know what bankers are thinking when they consider your application. One key to success in obtaining the financing you need is to understand the “six C’s of credit.” Here’s a closer look:

1. Character: Bankers will consider your personal character, which includes both your personal and business credit history. Character depends a great deal on other people’s impressions of you, including your trustworthiness and integrity. The banker will consider your references (are they, themselves, of good character?) as well as your experience in the business and/or industry. Last, but not least, what kind of impression do you make on the banker?

2. Capacity: Does your business have the ability to repay the money you are borrowing? Bankers don’t want to lend you money if it won’t have a positive result on your company; nor do they want to throw good money after bad with a loan that will just maintain the status quo. They want to see growth as a result of their investment so that they can get their loan back with interest. How soon will your business show a profit as a result of the changes you plan to make with the loan proceeds? Will the profit be sustainable and how big will it be? These are among the biggest questions bankers want answered.

3. Capital: How much capital do you and your business already have? The saying “it takes money to make money” applies here. Bankers will want to see that you have personally invested in your business and are willing to invest more. If you aren’t willing to put money into the business, why should they be? They also want to see that your equity in the business is growing.

4. Collateral: Collateral is extremely important in getting a small business loan. The bank will want to see that, in case the profits you project from the business don’t pan out, you have a “backup plan” for how they will get repaid. This can include a secondary source of repayment; a guarantee from a third party; or assets owned by you or your business. Intangible assets like goodwill or expertise don’t count; banks want to see tangible assets such as equipment, property, inventory or accounts receivable that could be sold to pay off the loan if necessary.

5. Conditions: This refers to the loan terms, including how much you are requesting, the length of the loan and the purpose you intend to use the money for. Conditions also encompass the current economic state of your industry and your region. For instance, if you own a restaurant and the restaurant industry as a whole is struggling, you will have to work extra hard to show why your particular restaurant won’t be affected by the conditions that are affecting other eateries.

6. Cash Flow: Last, but not least, bankers will want to know how the loan or line of credit will affect your business’s cash flow. How will you use the money from the loan? Have a detailed plan for what you will do and how it will help your business grow. The point is, bankers want to see that you have adequate cash flow to repay your loan.

Getting bank financing is still not easy in today’s economy—but if you have the six C’s of credit under control, you’ll greatly improve your chances of success.

Image by Flickr user Beast of Traal (Creative Commons)

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Tags: small business lending, small business loans, small business success
Posted in Capital Access, Raising Capital, Small Business, Uncategorized | 2 Comments »

Are Bank Mergers Hurting Small Businesses?

April 26th, 2011 :: Karen Axelton

By Karen Axelton

When the Great Recession struck in 2008, among the first casualties were small business owners whose loans were called in by big banks—often despite having a great credit rating and making every loan payment on time. Smaller, community banks quickly emerged as saviors. In 2010, 73 percent of small businesses using small banks got the credit they wanted, compared to just 48 percent of those using a large bank, a recent report by the National Federation of Independent Business showed.

But now, smaller banks small businesses have come to rely on are increasingly in jeopardy, as big banks are snapping up smaller ones in mergers and acquisitions. According to a recent report by CFO Magazine, the consolidation shows no signs of slowing. Due to a combination of acquisition and failure, the number of small banks has been shrinking for the past 10 years, CFO reports, declining from 10,204 insured institutions in 2000 to 7,657 in 2010.

Do you need to be worried that your community bank is at risk of acquisition? So far, banks most likely to be bought are those that are in distress or have already failed. Being located in a region where the housing market is still struggling is also a warning sign, as many larger banks in these areas are seeking ways to make up the lost income from mortgage lending.

But as the economy improves, experts predict, even thriving community banks won’t be immune. And with regulatory and reporting burdens set to increase, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, smaller banks may have to get acquired by bigger ones just to get the resources they need to comply with all the paperwork.

What will it mean for you if a big bank buys your community bank? First, small business ability to get capital is likely to suffer. Although many large banks have in recent months announced new commitments to small business, larger banks are traditionally less flexible about lending decisions.

Lending isn’t the only area where small businesses could feel a financial pinch. Fee increases are likely to hurt as well. New consumer protections implemented last year under the CARD Act limit banks’ abilities to charge fees and penalties on consumer credit cards, so banks have made up the difference by raising service fees, credit card processing fees and business credit card fees.

What can you do to protect yourself? CFO recommends small businesses that are close to needing financing may want to seek it now. If you’re ready to switch banks, look for a new one structured to help it fight unwanted takeovers–mutual banks that are “owned” by their customers are one example. And over at BNet.com, Mary Goodman and Rich Rukassoff recommend establishing a relationship with a “backup bank” now. That way, you won’t be taken by surprise if your current bank gets bought out.

Image by Flickr user Nick Ares (Creative Commons)

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Tags: Capital Access, small business lending, small business loans
Posted in Capital Access, Raising Capital | No Comments »