A new small lending tool for Iowa banks
The state's $5 million Iowa Capital Access Program has yet to be used, however
Friday, September 14, 2012 7:00 AM
About Iowa Business Growth Co.
Formed in 1981, the Johnston-based organization is a certified development company authorized by the U.S. Small Business Administration to provide financing to small businesses through the SBA’s 504 loan program. The program provides low-cost financing for small businesses to buy, build or renovate commercial real estate in which to operate. The program provides loans between $125,000 and $15 million. In the fiscal year that ended Sept. 30, 2011, IBGC handled more than $25 million in 504 loans, its highest loan volume in its 31-year history.
Other lending programs administered by Iowa Business Growth Co. include:
New Markets Tax Credit program. Since 2006, the company has been awarded approximately $200 million in tax credits for projects that are in as low-income census tracts. The tax credit program can fund loans up to $75 million. It currently has $66 million in remaining tax credits to disburse.
Wellmark Community Venture Capital Fund.
Businesses that receive financing through the fund make no interest or principal payments for two years, but must repay or refinance the loan in the following seven years. The $5 million fund was created in 2002 as part of a $25 million commitment by Wellmark Blue Cross and Blue Shield to inject economic development funds into the Iowa economy in return for the state reducing the tax rate on insurance companies.
Iowa Capital Access Program.
This new program is designed for smaller loans, with an average lending amount of $50,000.
Iowa Business Growth Co. has a straightforward mission: Identify gaps in small business financing and fill them with innovative loan products to help drive economic development in the state.
Its newest tool to carry out that mission: $5 million in funding for small businesses available through the Iowa Capital Access Program (ICAP).
The program, funded by a federal appropriation to Iowa a year ago through the Small Business Jobs Act of 2010, is designed to enable banks to make riskier small business loans to businesses that are creditworthy but have been unable to get loans. Financial institutions can enroll loans of up to $500,000 in the program, which requires the lender and borrower to pay a combined 3 to 7 percent into a reserve account that’s matched with the federal funding.
A number of small businesses have expressed interest, but it’s up to the banks to decide whether they want to participate, said Dan Robeson, president of Iowa Business Growth Co. (IBGC), which is administering the program for the state.
So far, no loans have been made through the program, although similar programs have been successful in several other states. For instance, Michigan, which has operated a capital access program since 1986, has leveraged nearly $680 million in bank lending supported by $24.3 million in a public-private fund.
For Iowa, “this is a program that’s totally new to the state; there’s not been anything even remotely close to it,” Robeson said. “So everyone, including us, really looked at this thing long and hard. There’s a fairly narrow window for where it makes sense to use it.”
Because the loan-loss reserves are held by each financial institution making the loans, “it takes a bank willing to make multiple loans under the program to make it work.” said Steve Kruse, IBGC’s vice president. Ideally, an institution would hold reserves on at least 10 ICAP loans to spread out the risk, he said. IBGC has committed $200,000 of its funds, which it will use to help facilitate loans, such as helping a client to meet capital requirements for the program, Kruse said.
“One of the appealing things about the program is that you can put some oddball loans into it that wouldn’t necessarily qualify for an SBA loan,” Kruse said. One bank is considering using it to provide a helicopter loan for a crop-dusting business, he said. Nonprofit organizations can also borrow through the program.
John Sorensen, president of the Iowa Bankers Association, said the slow ramp-up of the new program is not unexpected, particularly given the economy.
“I think it’s the kind of program that will probably grow slowly, depending on the needs,” he said. “I think the biggest drawback is that it’s a new program, which means you have to familiarize loan officers with it.”
Additionally, banks are still challenged in finding loan demand, he said. “Businesses are still hesitant about borrowing money until consumer spending increases. I think we’re going to see that for a while.”
The association will offer an educational breakout session about ICAP during its annual convention Sept. 16 and 17.
IBGC had provided a handful of loans through another Jobs Act program that enabled small business owners to refinance mortgage loans with balloon payments coming due by the end of this year. However, that program ends effective Sept. 27.
“It’s too bad it’s maturing right now because I think we’re finally getting to the point where the banks are understanding it and it was starting to gain some traction,” Kruse said. It’s possible Congress may reauthorize the program next year, he said.
Iowa Business Growth Co. is just one of five certified development companies in the nation that is organized as a for-profit business rather than a nonprofit. Its shareholders are primarily Iowa-based banks. In keeping with its mission, it charges the least amount that SBA allows in 504 loan fees.
“We’ve considered the not-for-profit route, but we believe in the for-profit model,” Robeson said. “It makes us operate like our business partners that we finance. We’ve got to be nimble, paying attention to detail. “
“The success that we’ve had in 504 lending and market lending has allowed us to step up and take on this capital access program,” he said. “That program is not a money-making proposition for Iowa Business Growth Co. in any sense of the word. We’re doing it because our mission is economic development in the state of Iowa; it’s not shareholder return.”
Small Business Credit Initiative
WHAT IT IS:
$1.5 billion in federal funding to the states to strengthen their small business lending programs, provided by the Small Business Jobs Act of 2010.
To leverage up to $15 billion in new bank lending.
Iowa received $13.1 million through the program. In addition to the $5 million allotted to ICAP, the Iowa Small Business Loan Program received $3.1 million; $5 million went to the Iowa Economic Development Authority, which to date has approved $1.25 million in seed capital to three companies through the Iowa Innovation Acceleration Fund.
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