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vol02_issue01

vol02_issue01

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Published by: workitrichmond on Jul 21, 2011
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Vol 2 • Issue 1
The Federal Reserve Bank of Richmond
2011
Community
Community Development
 
he U.S. credit crunch that resulted romthe worst fnancial crisis since the 1929Wall Street Crash is easing, but it’s ar rom over.Banks started to loosen some lending standardsin mid-2010, a year ater the recession ended,but loans remain hard to get by historical standards. That’s particularly damaging tosmall frms, which rely on bank credit or a lot o their unding.” 
 
1
Background
 The small business “credit crunch” has been amajor media story or the past two years, asillustrated by the above excerpt rom the
Wall Street Journal 
. Small businesses, typicallydened as businesses with less than 500employees, have historically aced morechallenges than most large rms in accessingcredit rom banks. They seek small loans, otenhave risky business models, and may lack veriable nancial records. In spite o theseissues, small businesses still use banks as theirprimary source o credit.
2
  The Small Business Administration (SBA) ismandated to increase small business access tocredit and does so primarily by acting as a creditguarantor.
3
Three dierent types o what SBAreers to as non-traditional lending partners aredescribed below, along with examples o thecredit products they oer to small businesses.
Superior Financial Group and Wal-Mart
Superior Financial Group (SFG), a ederallylicensed SBA 504 lender, and Wal-Mart teamedup in summer 2010 to provide small businessloans to Sam’s Club members. For Wal-Mart, theowner o Sam’s Club, this eort was initiated tohelp support and complement other servicesthey provide or small businesses, includinglow-rate merchant credit card processing,order-ahead programs and early shoppinghours.
4
 Sam’s Club initially examined alternativenancing sources that would increase creditavailability or their small business members.SFG was chosen as a partner because o theirspecialization in providing access to credit orunderserved borrowers and because they oerree online technical assistance and onlinetraining or borrowers. The initial small business loan pilot program,which was the rst o its kind, was introducedon July 6, 2010, to oer loans o up to $25,000to small business owners who are also Sam’sClub members. The loans range in size rom$5,000 to $25,000, but on average most areabout $15,000.
5
The loans are targeted tostart-up, small, or new businesses that areunderserved or in need o working capital;this mainly includes minority-owned, women-owned and veteran-owned businesses. Theloan amounts are smaller than what bankswould normally consider. An online applicationprocess oers an automated pre-qualiyingoption and other tools to educate applicants
New Alternatives in Small Business Financing
“ 
 
The Federal Reserve Bank of Richmond • MarketWise Community
Community Development
2
on the dierent types o loans. Applicantscan learn about the outcome o their loanapplication within minutes o applying. The Sam’s Club loan products ollow the sameguidelines as the SBA Community Expressand Patriot Express loan products. Theseloans require less stringent personal creditrequirements than traditional loans and thereis no required collateral. Sam’s Club loans rangein cost rom 7.5 percent to 7.75 percent insimple interest, depending on the size o theloan, and have no prepayment penalties orballoon payments. Borrowers are also eligibleor a discount o up to 20 percent o theapplication ee.
6
  Through Sam’s Club, SFG and Wal-Mart lendworking capital to small businesses in all 50states. Thus ar, business has been brisk. “Thedemand or these loans is so great that we haveexceeded the congressional cap or pilot SBAprograms o 200 loans per month,” says SueMalone, SFG’s president o strategies orsmall business and director o marketing.
7
 “We received 4,000 Sam’s Club loan requests inthe rst 10 days o the oering. I you actor inthat our loan approval rate alls between 50 - 60percent, it means that we had almost two yearsworth o undable loans in just that rst twoweeks.”
8
 Few o the Sam’s Club loans have matured aso this writing, so the perormance o theseloans has not yet been established. However,SFG’s deault rate or similar SBA loans standsat 12.1 percent rom October 2000 to October2009, which is lower than the 17.1 percent orSBA lenders during the same period.
9
“One o the things that makes our process so great isthat everyone in our shop was a small businessowner at one time or another. We understandhow to underwrite these pretty ecientlybecause o our experience,” says Malone.
10
 The only downside she sees is the currentlending cap, 100 loans per month, set by SBA.Just today I have spoken to about 30 smallbusinesses trying to stay alive; good businesses,seasoned businesses, viable businesses. But wehave to turn some o them down knowing thatwe could und them right now i we didn’t havethe cap.”
11
Anne Arundel EconomicDevelopment Corporation
As part o the ederal economic stimulusprograms, and in response to small businesscredit needs, SBA’s American Recovery Capital(ARC) loan program was established in 2009.
12
  The ARC product was designed or smallbusinesses that had recently been protablebut were having trouble meeting debtpayments. The bridge loans were designed tokeep otherwise viable companies rom sinkingbecause o “immediate nancial hardship,”oering up to $35,000 in interest-ree nancingthat could be used to pay short-term debtobligations such as loan payments, businesscredit cards, leases, and payments to suppliers.Businesses must show evidence o immediatehardship, like a decrease in sales, troublemeeting payroll, or loss o a line o credit.As initially designed, small businesses wouldaccess ARC loans through nancial institutionswho participated in SBA lending programs.However, in July 2009 Anne Arundel County inMaryland, through the Anne Arundel EconomicDevelopment Corporation (AAEDC), workedwith a consortium o 16 banks to sponsorits own ARC nancing program throughSeptember 30, 2010, the end date or the ARCprogram.
13
When AAEDC stepped in as anSBA 504 lender, some banks in Maryland hadalready begun making ARC Loans. However,many businesses ound that their lenders werenot oering 100 percent SBA-guaranteedloans, according to Mitchell Krebs, senior vice
 
The Federal Reserve Bank of Richmond • MarketWise Community
Community Development
3
president at BankAnnapolis, which participatedin the ARC program.
14
“AAEDC’s involvementwas in part a response when they learned thatmany businesses were being shut out o thisprogram,” he says.
15
 Starting with about 55 interested businesses,10 businesses completed the applicationprocess and wereapproved or ARC loansranging in size rom$9,000 to $35,000 andaveraging $28,620.
16
 In addition to moreavorable credit terms,Alexis Henderson, vicepresident o marketingand communications atAAEDC, explains that, “ARCloan applicants received assistance rom theSmall Business Development Center (SBDC)when preparing their ARC Loan applications.Ater receiving ARC loans, they are alsorequired to meet regularly, one-on-one withan SBDC counselor or additional advice andassistance.”
17
 AAEDC borrower Laura Moore, o Laura MooreDesigns, ound that the ARC loan helped herto ree up cash fow to purchase inventory andpay or marketing eorts.
18
It allowed her tomove orward with the plans she had laid outor her business.
19
With more than 97 percento all county businesses being classiedas small businesses, Anne Arundel CountyExecutive John Leopold elt that it was vital todo something to address the challenges acedby their business community in this economy.
20
 The AAEDC leveraged existing support rom itsconsortium o banks, the SBA and the SBDC toapprove 10 SBA guaranteed interest-ree loansthrough the ARC Loan program.
21
 The AAEDCcontinues to operate its small business lendingactivities, which involve SBA guarantees andloans up to $300,000, regularly reviewing itslending activities and modiying those eortsi necessary. The goal is to provide access tocapital or small businesses in Anne ArundelCounty and to increase the AAEDC’s lending,while managing the portolio to minimizeadditional risks.
22
 
Mountain BizWorks
Mountain BizWorks, acertied communitydevelopment nancialinstitution based inAsheville, North Carolina,oers a variety o fexiblegap nancing productsto small businesses andentrepreneurs in westernNorth Carolina. In 2009, Mountain BizWorksapproved approximately 50 loans worth a totalo $795,000 or small business owners andentrepreneurs.
23
The average loan is $15,000.While Mountain BizWorks is partially unded bythe SBA, it is not classied as a SBA 504 lender.Its loan pools are disbursed in the orm o grants and private loans.Originally a microlender, Mountain BizWorkshas expanded its lending to a wide rangeo small business sizes and types. WesternNorth Carolina has experienced an increasein the number o entrepreneurs in the regionand thus a corresponding increase in thedemand or small-business training, coachingand loan capital. This created a need orgrowth and expansion o Mountain BizWorks’programs and lending capabilities. Accordingto Mountain BizWorks chie executive ocer,Shaw Canale, “The beauty and creativity o what we have to oer is that we can be sofexible. We can provide capital or start-ups,or working capital, or lines o credit, and evencommercial real estate projects as long as we
In 2009, MountainBizWorks approvedapproximately 50 loansworth a total of $795,000for small business ownersand entrepreneurs.

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