Larger fund to absorb EDC micro-lending program

The Small Business Loan Fund, begun in 1986 with money from the federal Economic Development Administration, a division of the U.S. Commerce Department, makes loans to small businesses unable to obtain financing at commercial banks.
By definition, the risk of failure is greater with these companies. For loans made between January 2005 and March 2007, 16 of the 58 loans by the Small Business Loan Fund and a smaller, companion micro-fund, were charged off, according to information provided to the Providence Business News in response to a Freedom of Information Act request. (The total amount of loans charged off during that period is larger, reflecting loans made earlier than 2005.)
Since March 2007, however, no new loans issued have been charged off, according to figures released by the EDC in March 2010.
The charged-off loans include:
• Narragansett Pellet Corp., East Providence, $325,000 out of $325,000 loaned (two separate loans).
• Genesis Distribution & Marketing Inc., East Providence, $213,673.53 out of $250,000 loaned.
• 4K Insurance Inc., Central Falls, $29,320.63 out of $35,000 loaned (micro-loan).
• Creative Products Inc., Providence, $23,624.91 out of $35,000 loaned (micro-loan).
• The Labor Co-op LLC, Providence, $8,325.80, out of $15,000 loaned (micro-loan).
• New England Environmental Services and Pequot Industries LLC, Cumberland, $196,734.85 out of $200,000 loaned.
• Steve Lima dba Crave Restaurant, Wakefield, $13,501.86 owed out of $15,000 loaned (micro-loan).
• Colonial Aldana RI Case LLC, Providence, $33,000.20 owed out of $35,000 loaned (micro-loan).
• Victory Food Services Inc., Cranston, $220,666.50 owed out of $250,000 loaned.
• Davin Inc., Providence, $461,559.13 owed out of $500,000 loaned.
• JSW Transport Inc., Johnston, $34,050.59 owned out of $35,000 loaned (micro-loan).
• Crest Surfaces LLC, Lincoln, $84,836.98 owed out of $100,000 loaned (flood loan).
• Federal Hill Florist Inc., Providence, $9,618.62 owed out of $10,000 loaned (micro-loan).
• Mare’ Corp., Cranston, $20,000 owed out of $20,000 loaned (micro-loan).
• Ride Group LLC, Providence, $9,874.32 owed out of $10,000 loaned (micro-loan).
Many of these charged-off loans – nine out of 16 – were part of a micro-loan program, officially known as the Micro Business Emerging Growth Fund. It has operated since August 2005 under a separate $1 million allocation, and it has been successful in providing numerous startups with the money needed to open doors.
A day care center in Warwick, A Family Tree, for instance, was able to borrow $30,000 in 2008 to buy a building in order to expand its facilities. The business now runs three child care centers in Warwick, serving about 220 students in before- and after-school and pre-school programs, according to co-owner Erica Saccoccio. It currently employs 25 people.
Similarly, Spirare Surfboards, a startup in Providence, received $10,000 in 2010. Kevin Cunningham, a 2005 RISD graduate in architecture, seeks to carve out a niche in the $150 million annual national market for manufacturing surfboards. From his cubbyhole in a woodworking shop in Conley’s Wharf on Allens Avenue, Cunningham designs and manufactures sustainable surfboards.
Despite the micro-fund’s successes, however, if and when the larger fund is recapitalized, the micro-lending program will cease to exist as a separate line item, according to EDC officials.
“There’s no apparent demand for these loans,” Saul said earlier this year, explaining the dearth of recent micro-business loans. “These loans go to business startups, and most people are not starting businesses in a deep recession.” About 22.5 percent of the $840,000 loaned from the micro-loan fund between 2005 and 2010 – $182,000 – had to be charged off because of business failure, according to Saul.
Though Saul sees little demand for the micro-loans, since the beginning of 2009 the EDC says at least 20 potential applicants have been referred to two new micro-business lending options – SEED, the Southeastern Economic Development Corp., which provides micro-loans via the U.S. Small Business Administration, and ACCION USA, a micro-finance lender for small businesses – because they “have better funding than we do,” said Sean Esten, the financial portfolio manager.
“The micro-loan program has always been a set-aside loan fund,” Saul said, explaining why it will not be continued as a separate allocation. “I think the set-aside is too limiting. … Going forward, rather than having a separate set-aside, the micro-loans will be done under the small-business loan fund – but as smaller loans.
Claudine M. Tikoian, vice president at the Business Development Company of Rhode Island, and a former loan officer at the EDC working on the Small Business Loan Fund, agrees managing a micro-loan fund can be a real challenge.
But she also said “there is a real need,” for such loans, “with more and more people out of work and trying to start their own company,”
Such loans, she continued, are very labor intensive. “You tend to spend more time on a $35,000 loan than you do with a $100,000 loan. There’s a lot more handholding involved. And, the companies are often at the greatest risk, with little or no collateral,” she said. •