New SBA program designed to allow general-purpose loans like banks

The U.S. Small Business Administration is starting a new lending program in March that will, for the first time, allow financial institutions with community-development programs to provide general-purpose loans just as banks do.
“This is something we have not been able to do before,” said Maria Gooch-Smith, executive director of the South Eastern Economic Development Corp. – or SEED – based in Taunton. “We don’t do 7(a) loans now, and this is giving us an incentive to take a little more risk.” The loans through the Community Advantage Program will be for up to $250,000 and targeted to small businesses. Smaller loan amounts will especially help businesses operating for less than three years, including startups, she noted.
The Community Advantage Program and another, dubbed the Small Loan Advantage – which does target banks – will begin March 15. Both aim to encourage lower-amount 7(a) SBA loans to businesses in what the SBA calls “underserved markets,” meaning women- and minority-owned businesses as well as those in rural areas. The 7(a) loans, the SBA’s most popular offering, can be used for a variety of general purposes including working capital and the purchase of real estate or equipment. A streamlined application process for both lenders and borrowers is part of both programs, the SBA said.
The Community Advantage Program allows community organizations that already engage in SBA-backed lending, such as SEED, to now take on 7(a) loans, with the usual SBA guarantees, 85 percent for loans up to $150,000 and 75 percent for those greater than $150,000. The SEED agency already handles microloans for businesses in Rhode Island as well as southeastern Massachusetts.
Community Advantage, the SBA noted in news releases, is a three-year pilot program to expand the points of loan access beyond banks and other formal financial institutions such as credit unions to “mission-focused” financial institutions, community-development financial institutions, certified development companies and nonprofit microlending intermediaries. The idea, the SBA said, is to “leverage the experience these institutions already have in lending to minority and women-owned companies and startups in economically challenged markets, along with their management and technical assistance expertise, to help make borrowers successful.”
Small-business advocates say the credit crunch is more than a result of the recession because obtaining adequate capital always has been a problem for small business. “We’ve always had a credit crunch,” Gooch-Smith said. “It’s just becoming worse.”
Mark S. Hayward, executive director of the SBA district office in Providence, said access to capital remains “a huge issue” for small business and is “especially critical” in Rhode Island, where economists say the effects of the recession are likely to linger longer than elsewhere.
The availability of smaller-amount loans “will be of great benefit to the women we serve,” said Susan Rittscher, president and CEO of the Center for Women & Enterprise, based in Boston with a Providence office.
“Most of our loans are very small,” she said, and many are for startups that generally need about $250,000 to open. The center, she explained, usually refers business owners in need of loans to community banks or agencies such as SEED, “but we do help prepare” loan- application packages.
In addition to handling microloans (loans of less than $50,000) for the SBA in Rhode Island, SEED now can make small-business loans of up to $200,000 and, Gooch-Smith said, uses three sources of funding: funds provided by the two states; funds from the federal Economic Development Administration; and an $800,000 pool of its own money, representing proceeds earned through various programs.
It is not clear to her if funds from all three sources will be available for the Community Advantage loans, but she said she is certain the SBA will make that clear when it releases more details about the program in the coming weeks. In addition to startups, other businesses that would benefit from the new program would be those with limited collateral, such as an information technology company with only furniture, computers and accounts receivable to offer as security, Gooch-Smith said. Banks often are reluctant to take a chance on such companies.
“Often we take more risk than a bank does,” she said of SEED. Now, with the Advantage program, “we can even take a little bit more risk.” Most, if not all, of the 34 loans that SEED made under its existing small-business loan program in 2010 were to businesses that banks would not finance, according to Gooch-Smith. These loans amounted to a total of $1 million, she said, and ranged from $2,000 to $100,000.
The 85 percent guarantee that the new program provides for loans of up to $150,000 is likely to free up more funds because it lessens the risk to lenders such as SEED. ‘If we make a loan of $100,000 [without SBA backing and it defaults] it is tough for us to take a $100,000 loss,” she explained. The 85 percent guarantee means “in a worst-case scenario, we’re going to take a 15 percent hit,” Gooch-Smith said.
Henry A. “Bud” Violet, president of the Providence-based Ocean State Business Development Authority, said he is “definitely interested in participating” in the Community Advantage program and agreed that his lending organization appears to qualify under the terms released to date by the SBA. However, “we need more specifics,” he added. “It is hard to comment without the details.”
The second program, Small Loan Advantage, is aimed at encouraging the 630 financial institutions nationwide that make up the SBA’s Preferred Lender Program to provide smaller loans to more small businesses, with a $250,000 maximum and the usual SBA guarantees. •