Thanks to a new program offered by the U.S. Small Business Administration, local small business owners can now secure loans many traditional banks are wary of giving.
The SBA’s Microloan program, launched in San Diego on April 11, can provide small businesses with loans of between $1,000 and $35,000 , amounts that are too low to be profitable for banks, program officials say.
The program was created by the Treasury Department, and provides the SBA funds to loan to intermediaries. San Diego’s Certified Development Co., the local intermediary, then borrows the funds from the SBA to make the microloans available to businesses, according to Alex Robinson, executive director of San Diego’s CDC Small Business Finance Corp.
“We make the loans available to small businesses at a decent rate so they can have the capital they need to grow and expand and develop,” Robinson said.
– Too Small To Qualify
Programs like this are important to small businesses, many of which don’t qualify for the traditional loan a bank wants to give.
“The microloan program … allows a business to get a very small loan of up to $35,000, which is often needed by a company that really doesn’t need very much in the way of a loan, but does need a loan,” said George Chandler, director of the U.S. Small Business Administration’s San Diego district.
“Many of the banks think it is not profitable to get involved with a loan that small,” he said.
The administrative work alone tends to push banks away from making small loans.
“A lot of banks struggle with the paperwork and oversight of small loans, and in fact, some banks have tried to treat such loans similar to a credit card, with the same ease of access to a line of credit. But clearly the demand for such loans really outstrips the supply of money,” said Julie Meier Wright, president and CEO of the San Diego Regional Economic Development Corp.
While the upper cap of $35,000 may not seem like enough money to help a new business, Robinson and Chandler say sometimes that small amount can make a big difference.
“People use the smaller loans as funds to start their business, the seed money to purchase the license and initial supplies, office equipment, computers and that kind of thing,” Robinson said.
Sometimes it is just enough to make a necessary purchase.
“They might just need to buy a truck or some computer equipment,” Chandler said.
Wright agreed that giving loans to small businesses in needy areas could have far-reaching effects.
“I would say the businesses that obtain these loans are typically very tiny, but might well be retail businesses. If they have the opportunity to succeed, you could draw the conclusion that they contribute to a revitalized inner-city area,” Wright said.
– Priority Borrowers
The program is available to all small businesses in San Diego County, but the CDC will be paying special attention to those business owners who have a tough time getting a bank loan.
“There are some businesses in very early stages or are owned by women or minorities that typically have somewhat more difficulty getting a loan,” Chandler explained.
EDC research has shown that these types of businesses in particular need extra help, Wright said.
“Some of them aren’t collateralized in the same ways as traditional manufacturing businesses and in that case, it’s difficult to get a loan,” she said.
The CDC will also be looking for borrowers who don’t normally qualify for bank financing.
“Most banks like businesses who have been running for three years, but those in business for a year or two need financing, too. We’re here for those kinds of borrowers,” Robinson said.
The CDC also considers giving loans to startups, businesses that have unstable credit, or those that don’t have the revenues banks usually want to see, Robinson said.
“We’d like to see the majority of these loans in low- to moderate-income areas, but (the program) isn’t limited to that,” Robinson said. “We want to see business owners who have sufficient business experience.”
– Technical Aid Is Available
This program can also provide businesses with technical assistance so that they can operate effectively.
“A business owner may … know how to run the lathe or paint a building or provide some service or product, but they (may not) know how to mange very well. We can provide that technical assistance,” Chandler said.
In this first round of funding, the CDC will borrow $300,000 from the SBA to fund the loans to businesses. The next two rounds of funding over the coming four years will provide an additional $900,000 for the program.
The CDC expects to fund approximately 100 businesses with the total $1.2 million allocation from the SBA, Robinson said.
But beyond that, the CDC should be able to offer a continuous, self-sustaining microloan program after the third round of funding, since payments from the first round of borrowers can be turned around as loans to future businesses, Robinson said.
Business owners interested in obtaining a loan from the CDC can contact Robinson at (800) 611-5170 or (619) 291-3594. More information is available at (www.cdcloans.com).
Johnson is a freelance writer for the Business Journal.
