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To Your Credit, Part 2

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(Photo: ©iStockphoto.com/wdstock)

Mark E. Battersby |

Provisions in the Small Business Jobs Act may soon ease the Great Recession’s prolonged credit crunch.

ARDMORE, Pa. — According to the experts, the recession ended in the summer of 2009. Three months after that, however, U.S. Treasury Secretary Timothy F. Geithner said, “This credit crunch is not over.” With all the available capital apparently going to big business and government, what can the financially-strapped small-business owner do?
There are a few bright spots among the clouds, as evidenced by new government loan guarantees and financing assistance. And your drycleaning business may be able to benefit from these programs and the funding they offer.STATE CAPITAL
SSBCI—the State Small Business Credit Initiative—encourages financial institutions to lend to small businesses that might not otherwise meet conventional underwriting standards by establishing a “guarantee” reserve account to recover any losses from loans enrolled in the program.
Drycleaning plants can use the loans as working capital, lines of credit, or for the purchase or construction of fixed assets such as buildings and equipment. The program also permits refinancing of existing loans.
An SSBCI borrower must be a small business with annual sales of less than $10 million that creates or retains jobs. Working-capital loans can go up to $250,000, or a maximum of $500,000 if the loan goes toward fixed assets.
The federal government will kick in the funds to a new or existing state CAP. A CAP is a portfolio insurance concept in which 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 usual risk threshold and can be used to recover losses on loans made under the program.
A CAP loan has been described as a private market transaction between a lender and a borrower with all terms, fees, conditions, rates, collateral, etc., determined by the lending bank. 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’s lenders and 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 premiums 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, states must demonstrate that each $1 of public support will result in $1 of new, private credit, and that individual guarantees will be limited to loans of not greater than $20 million and borrowers with 750 or fewer employees.

The program typically targets borrowers with 500 or fewer employees and loans with an average principal amount of $5 million or less. In addition, states must show that CAP and other credit-support programs together will result in $10 of new small-business lending for each $1 in federal funds.
If a state doesn’t have an existing small-business capital-access or credit-support program, it can establish one in order to obtain SSBCI funding. If a state does not file the required notice of intent or fails to meet the June 2011 deadline, municipalities within the state can apply for a pro-rated share of the state’s allocation, provided they meet all program criteria. Up to three municipalities in a state may be eligible to receive SSBCI funds.FUNDS ON THE WAY
Michigan and North Carolina were the first to receive SSBCI funds. The funds will, as the Treasury announced, strengthen the states’ existing programs that leverage private lending to help finance creditworthy small businesses and manufacturers that are not getting the loans they need to expand and create jobs.
All 50 states, the District of Columbia, and U.S. territories are can apply for funds for programs that partner with private lenders to extend greater credit to small businesses. States are required to demonstrate a minimum “bang for the buck” of $10 in new private lending for every $1 in federal funding. Accordingly, the $1.5 billion commitment the federal government will make for this program is expected to support $15 billion in private lending.
Now is the time to form a relationship with a small bank in your neighborhood. Get to know the president and loan officers. Ask if they intend to participate in the new financing programs available to small banks. And most importantly, ask how they underwrite small-business loans and whether your drycleaning business is a candidate.
Also investigate the options available from lenders specializing in financing drycleaning businesses. As the credit crunch eases and customers begin to return, everyone will be eager to have you as a client.Click here to read Part 1 of this story.

About the author

Mark E. Battersby

Freelance Writer

Mark E. Battersby is a freelance writer specializing in finance and tax topics based in Ardmore, Pa.

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