SBA Woos Credit Unions With Fresh Round of Micro Loan Funds
In late August, the agency said the American Recovery and Reinvestment Act funded an additional $50 million for loans and $24 million for technical assistance to increase access to capital for small businesses. Congress actually appropriated $6 million for the micro loan program with the SBA leveraging up to $50 million toward the loans. The program is shifting to funding provided under the Recovery Act now that it has exhausted the regular FY 2009 appropriations for $20 million in loans and $20 million in technical assistance.
"There is a natural overlap for credit unions, especially community credit unions," said Grady Hedgespeth, SBA director of office of financial assistance, on the industry's reputation with micro lending. "I'm sure they're seeing a lot of businesses that used to be bankable. With the absence of capital, they are looking for resources. Credit unions have been close to the ground on these issues for years."
SBA's micro loan program provides loans up to $3.5 million to approved micro lenders to finance their lending to small businesses. The interest rate is based on the five-year Treasury rate, with adjustments tied to a micro lender's average loan size. Micro lenders then provide loans of up to $35,000 to entrepreneurs, which can be used for working capital and acquisition of materials, supplies, furniture, fixtures and equipment.
SBA also provides grant funding to micro lenders to finance technical assistance and counseling programs for their borrowers. SBA's reimbursement is capped at 25% of the lender's outstanding SBA loan portfolio.
One of those beating the micro lending drum is $55 million Alternatives Federal Credit Union in Ithaca, N.Y. The cooperative has been an SBA intermediary since 1999, according to Bob Anderson, business loan officer. As of August, Alternatives had 60 micro loans on the book totaling $579,000.
Members have used the loans mainly for service and retail businesses such as physical therapy firms and jewelry-making shops.
"In our experience, there's been a much slower default rate on the micro loans than our standard loans, including 7(a) loans," Anderson noted.
Like many SBA micro loan participants, Alternatives is an intermediary providing loans for a specific geographic area. The agency provides the loan funds at below-market rates which are then loaned out, said Deirdre Silverman, director of community programs at Alternatives. The SBA, which refers budding entrepreneurs to the credit union, also provides grant funds that can be used to offer classes to those interested in starting or expanding their businesses.
"Now that interest rates have gone down so low and because we are a depository institution with millions of dollars in deposits, [the intermediary role] is not as useful as the grant funds," Silverman acknowledged.
In addition to Alternatives, the $246 million Self-Help Federal Credit Union's venture fund is the only other credit union intermediary. As with other SBA loan programs, the agency has taken several steps to increase credit union participation, Hedgespeth said. The loan approval process has been streamlined away from centralized centers to district offices. There are also several service bureaus in place to assist credit unions with loan processing and determining program eligibility, which has lowered the cost of entry. Hedgespeth said he couldn't reveal the names of the bureaus.
Self-Help Federal Credit Union in Durham, N.C., which has offered micro loans since 1992, has closed on 650 of them, said Self-Help spokesman David Beck.
"We are hugely supportive of them," Beck said. "In terms of the programmatic impact, it's huge for us because these loans are often so small and require so much time to work on that the technical assistance funding really makes it possible for us to do them in a responsible way that is also good business for us."
Hedgespeth said credit unions are good targets for the micro loan program because they often already meet the requirement of having 15% of their assets set aside for loan loss reserves. Another major requisite is having a track record of providing loans under $35,000, he added.
"We do have applicants we have to say 'no' to because they don't have the matching funds for loan losses or experience," Hedgespeth said. "A typical credit union may have done a couple of member business loans and may want to do more without going up against their cap."
In all, there are 170 intermediaries in the SBA's micro loan program. Since the Recovery Act, the agency said it has approved eight new applications from lenders to join and has 15 new loans totaling $10.7 million in Recovery Act funds ready to be disbursed. Of the 15, eight are for new micro lenders in Vermont, Minnesota, Texas, Florida, Ohio, Pennsylvania and New York.
Anderson said one reason why credit unions may not be gravitating to the SBA's micro loan program is because of overlap. For instance, if the SBA gives a credit union a $100,000 loan and from that, it lends out $10,000 or $15,000 at a time up to the program's maximum, they are essentially funded by that initial loan.
"In a normal world, if you were to do a regular loan that wasn't a SBA loan, the funding would come from the depositors' balance," Anderson said. "Maybe some credit unions don't see the need to borrow funds from SBA because they have their own pool of funds to pull from."
Still, Anderson said Alternatives has supported the program because it has been a part of the credit union's market niche for nearly a decade. The cooperative does have to submit a quarterly collection and reserve report, but "it's very simple and doesn't take long to do." Silverman noted that the SBA is dependent on government funding each year but the micro loan program has a lot of support at the top of the SBA. It takes about a month for lenders to go through the vetting process to participate.
After the latest recovery funds are depleted, Hedgespeth said the SBA is hoping Congress will earmark another $20 million for loans and $24 million for technical assistance as it has done in the past. With the new funds, the agency is expecting to sign up to 50 new intermediaries.
"One important thing is the statutory mandate that we orient micro lenders to urban areas, those with substantial poverty and minority populations, which is again, why I think community credit unions would be good candidates," Hedgespeth said.