Psst! Need Funding?

The recession ended, at least according to many experts, during the summer of 2009. Just three months after it reportedly ended, however, Timothy F. Geithner, secretary of the US Treasury, made the announcement: “This credit crunch is not over.”

But with all available capital apparently going to big business and government, what can the average, financially strapped print provider do?

Well, now might be a good time to form a relationship with a small bank in your neighborhood if you haven’t already done so. Get to know the president and loan officers. Ask if they intend to participate in the new financing available to small banks. And, most importantly, find out how they underwrite small business loans and whether your business is a candidate.

Fortunately, there are a few bright spots among the clouds, including last fall’s Small Business Jobs Act, which created the State Small Business Credit Initiative (SSBCI) and funded it with $1.5 billion to strengthen state programs that support lending to small businesses. These funds were designed to spur up to $15 billion in lending, and January 2011 saw the first wave of awards to the states.

Under the SSBCI, participating states will use the federal funds for programs to leverage private lending to help finance small businesses such as print providers that are credit-worthy but are not getting the loans they need to expand and create jobs.

The SSBCI will allow states to build on successful models for state small-business programs, including collateral support programs, capital access programs (CAP), and loan-guarantee programs. Existing and new state programs are eligible for support under the SSBCI.

More funds from Uncle Sam
Last year’s Jobs Act included other provisions as well, all designed to help small businesses obtain funding. Among that bill’s many provisions are several new funding programs such as:

* A Small Business Lending Fund to provide up to $30 billion in capital to financially sound small banks with less than $10 billion in assets, to encourage them to lend money to small businesses. As an incentive, those banks that increase lending to small business by 10 percent over the previous year will pay as little as one percent on the capital they acquire from the fund.
* Any digital printing businesses considering Small Business Administration loans stand to benefit from the extension of provisions that amped up SBA lending guarantee programs and fee reductions that recently expired. In addition, the bill increases the maximum loan size for the SBA's 7(a), 504, and microloan programs. The 7(a) and 504 loan program maximums would bump from $2 million to $5 million, and the microloans would increase from $35,000 to $50,000. Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small-business owners to use 504 loans to finance certain mortgages to avoid foreclosure.

The SBA’s primary and most flexible 7(a) loan program is designed for both start-up and existing small businesses, and involves government-backed guarantees for amounts loaned for general business purposes. Last spring, the Treasury and the SBA announced a joint initiative to make direct purchases of securities backed by 7(a) loans on the secondary market in the hope of freeing capital and encouraging more small-business financing.

The SBA’s CDC/504 loan program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization. It’s ideal for small print shops requiring “brick and mortar” financing. Rather than commercial lending institutions, 504 loans are delivered via CDCs (certified development companies) – private, non-profit corporations set up to contribute to the economic development of their communities.

The SBA also has a unique program to provide small (up to $30,000), short-term “microloans” for working capital for the purchase of inventory, supplies, furniture, fixtures, machinery, and/or equipment. Ideal for those needing small-scale financing and technical assistance, the SBA microloan is delivered through specially designated intermediary lenders (non-profit organizations with experience in lending and technical assistance).

Accessing state capital programs
The new $1.5 billion SSBCI encourages financial institutions to lend to small businesses that might not otherwise meet conventional underwriting standards. This is accomplished by establishing a unique loan “guarantee” reserve account to recover losses from loans enrolled in the program. The loans may be used by graphics producers, content creators, and other borrowers as working capital, lines of credit, or for the purchase or construction of fixed assets such as buildings and equipment. Refinancing existing loans is also possible under the program.

An SSBCI borrower must be a “small business” with annual sales of less than $10 million and must create or retain jobs. Working capital loans can be for as much as $250,000 with a maximum $500,000 for fixed assets.

Bottom line: The federal government will kick in the funds to either a new or existing state CAP. While SSBCI funds may be used for collateral support and other innovative credit access and guarantee initiatives, the primary thrust is to CAPS.

A CAP loan has been described as a private market transaction between a lender and the borrower with all terms, fees, conditions, rates, collateral, etc., being determined by the lending bank. CAP is a portfolio insurance concept where the borrower and the state each contribute a percentage of the loan amount into a reserve fund located at the lender’s bank. This reserve fund enables the financial institution to make loans beyond its conventional risk threshold and is available to draw upon to recover losses made under the program.

The typical CAP program encourages lending by establishing a unique loan “guarantee” reserve pool. The state, the lender, and the borrower each typically pay a small fee into the pool. With every loan, each participating lending institution enrolls in the CAP program, and the reserve pool grows. The reserve pool is available to the participating lender for recovery of any losses on any loan they have registered or enrolled in the CAP.

To be eligible for funding, a state CAP is required to: provide portfolio insurance for business loans based upon a separate loan-loss reserve fund for each financial institution; require insurance premiums to be paid by the financial institution lenders and by the business borrowers to the reserve fund to have their loans enrolled in the reserve fund; provide for contributions to be made by the state to the reserve fund in amounts at least equal to the sum of the amount of the insurance premium paid by the borrower and the financial institution to the reserve fund for any newly enrolled loan; and provide portfolio insurance solely for loans not exceeding $5 million to borrowers with 500 or fewer employees.

For other types of credit-support programs, a state must demonstrate that: $1 of public support will result in $1 of new private credit; and individual guarantees will be limited to loans not greater than $20 million and borrowers with 750 or fewer employees.

On average, the program will target borrowers with 500 or fewer employees and loans with an average principal amount of $5 million or less. In addition, states must show that, taken together, its CAP and other credit support programs will result in $10 of new small business lending for each $1 in federal funds.

If a state does not have an existing small-business capital access or other credit support program, the state can establish one in order to obtain SSBCI funding. If a state did not file the require notice of intent or fails to meet the June 2011 deadline, municipalities within the state may apply for the pro-rata share of the state’s allocation – provided the municipality can meet all of the program’s criteria. Up to three municipalities within a state may be eligible to receive SSBCI funds.

Successfully opening the funding spigot
The US Department of the Treasury recently announced that the states of Michigan and North Carolina were the first to receive SSBCI funds. These funds will, as the Treasury announced, strengthen the states’ existing programs that leverage private lending to help finance small business and manufacturers that are creditworthy but who are not getting the loans they need to expand and create jobs.

Under SSBCI, all 50 states, the District of Columbia, and the US territories are offered the opportunity to apply for funds for programs that partner with private lenders to extend greater credit to small businesses. States are required to demonstrate minimum “bang for the buck,” of $10 in new private lending for every $1 in federal funding. Accordingly, the $1.5 billion funding commitment that the federal government will make for this program is expected to support $15 billion in additional private lending.

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years. He currently writes for publications in a variety of fields, syndicates two weekly columns that appear in more than 65 publications, and has written four books.