If you’re having trouble getting a loan, small business lending funds may be the answer.

By Mark E. Battersby

Last fall’s Small Business Jobs Act (“Jobs Act”) 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 — and many chiropractic practices. Designed to spur up to $15 billion in lending, January 2011 saw the Jobs Act release the first wave of awards to states.

Under the SSBCI, participating states will use the federal funds for programs that leverage private lending to help finance small businesses, including chiropractic and other professional practices that are creditworthy but 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 (CAPs), and loan guarantee programs. Existing and new state programs are both eligible for support under the SSBCI.

Help from Uncle Sam

Last year’s Jobs Act included a number of provisions designed to help small businesses obtain funding. Among the bill’s many provisions are several new funding programs such as:

• A Small Business Lending Fund that provides up to $30 billion in capital to financially sound small banks (those with less than $10 billion in assets) to encourage them to lend money to small businesses and professional practices. As an incentive, those banks increasing lending to small business by 10 percent over the previous year will pay as little as 1 percent on the capital they acquire from the fund.
• Any chiropractor considering Small Business Administration (SBA) loans will benefit from the extension of provisions that strengthened SBA lending guarantee programs and fee reductions that recently expired. In addition to requiring quicker action by the SBA, the bill increased the maximum loan size for the SBA’s 7(a), 504, and microloan programs.

The SBA’s 7(a) and 504 loan program maximums were bumped from $2 million to $5 million, and microloans were increased from $35,000 to $50,000. Loans made under the SBA Express program have been temporarily increased in size from $300,000 to $1 million. Also included is a temporary allowance for professionals and other 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 operations, as it 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 is ideal for small businesses and chiropractic practices requiring “brick and mortar” financing. Rather than commercial lending institutions, 504 loans are delivered via CDCs (Certified Development Companies) — private, nonprofit corporations set up to contribute to the economic development of their communities.

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

The state of 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 borrowers as working capital, lines of credit, or to purchase or construct fixed assets, such as buildings and equipment. Refinancing existing loans is also possible under the program.

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

[ITAL]Bottom line:[/ITAL] The federal government will add funds to both new and existing state CAPs. While SSBCI funds may be used for collateral support and other innovative credit access and guarantee initiatives, the primary thrust is to CAPs.

Pooling resources for security

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 that each participating lending institution enrolls in the CAP program, 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.

A CAP loan has been described as a private market transaction between a lender and a borrower with all terms, fees, conditions, rates, collateral, and so forth 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 recover losses made under the program.

To be eligible for funding, a state CAP must:

• 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 to 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, a state 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 required 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.

The first few drops

The Treasury recently announced that the states of Michigan and North Carolina were the first to receive SSBCI funds. These funds should strengthen the states’ existing programs that leverage private lending to help finance small businesses, professional practices, and manufacturers who are creditworthy but not getting the loans they need to expand and create jobs.

Under SSBCI, all 50 states, the District of Columbia, and the U.S. territories are offered the opportunity to apply for funds for programs that partner with private lenders to extend greater credit to small businesses and professional practices. 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 funding commitment that the federal government will make for this program is expected to support $15 billion in additional private lending.

Opening the spigot

The recession officially ended (according to some experts) during the summer of 2009. Just three months after the recession reportedly ended, however, Treasury Secretary Timothy Geithner announced: “This credit crunch is not over.”

With all available capital apparently going to big business and government, what can the average, financially-strapped chiropractic practice do?

Now might be a good 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 available to small banks. And, most importantly, find out how they underwrite small business loans and whether your practice is a candidate.

Fortunately, there are a few bright spots among the clouds as evidenced by the many new government loan guarantees and financing assistance programs. Could you and your practice benefit from these programs and the funding they offer?

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be reached at 610-789-2480.

DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.