New Loan Source For Expanding, Refinancing Small Business

September 24, 2008
| By Pete Daly |
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LANSING — The Michigan Certified Development Corp., a major source of Small Business Administration 504 loans throughout Michigan, has a new exclusive partnership with the Community Reinvestment Fund USA that provides capital for some situations that don't qualify for SBA 504 loans.

The CRF, a nationwide nonprofit organization based in Minneapolis, is dedicated to creating jobs in economically disadvantaged communities by loaning capital to nonprofit community development lenders through its secondary market for loans. The loans are available to small businesses or nonprofit organizations that are expanding in economically distressed areas as determined by income data collected by the U.S. Census.

Citing the "tightening credit environment we're in — Michigan, in particular," Jane K. Sherzer, president of the MCDC, said the new joint venture gives MCDC an edge in offering a new source of loans for businesses that want to expand in Michigan. Unlike SBA 504 loans, capital loaned by the CRF can be used to refinance loans.

Frank Altman, president and CEO of CRF, said it provides loans for a limited amount of refinancing, sometimes for the small businesses that have been "using that old American tradition — a credit card."

"I think the general economic environment in Michigan may be a little more challenging because of what's happened in the auto industry," said Altman.

Of course, that would be compounded by the credit crisis seen throughout America now.

Sherzer said the MCDC is already working with two companies using CRF capital. One is a small furniture manufacturer in Lansing that is trying to expand. The company thought it had bank financing lined up, until the bank "got cold feet," according to Sherzer.

The other is a small company in Battle Creek that ran into financial difficulties. The bank it had been borrowing from "didn't want to be banking with them any longer" and "kicked them out," said Sherzer.

The credit situation in Michigan "certainly is one of the most challenging economic situations any of us have seen in our lifetime," Sherzer said.

"I've been in finance and commercial banking for about 24 years, and this is one of the hardest cycles I've seen — the most prolonged and most challenging."

She is quick to add, however, that "from our perspective, there's still plenty of opportunities" for businesses to locate in Michigan, or for existing businesses to expand.

The MCDC is a nonprofit organization started in 1982 to use the SBA 504 loan program to provide healthy small- and medium-sized businesses with long-term fixed rate financing for the acquisition or construction of fixed assets. Projects are financed through a public/private partnership that involves private lenders financing 50 percent of project costs; MCDC/SBA covering up to 40 percent of project costs; and the small business owner investing at least 10 percent of project costs. That reduces the amount of equity normally required of the borrower and provides long-term, fixed-rate financing.

According to the SBA Web site, 504 loans are available through nonprofit certified development companies set up to contribute to the economic development of the community. In the case of the MCDC, the "community" is most of the state of Michigan. It has arranged SBA loans in about 75 counties out of Michigan's 83, according to Sherzer.

There are about a half-dozen CDCs providing SBA loans in Michigan, including the Lakeshore 504, which has offices in Holland and in Grand Haven.

The MCDC is "looking at a record year this year for our 504 loan program, which says something," said Sherzer. She agreed that some of the increase is due to tighter credit at commercial lenders.

"Certainly the rates have been rising — and the SBA rates rising along with them," said Sherzer. "Our rates are not as low as they used to be, (but) they are still pretty attractive. Our 20-year rate is 7 percent on an SBA loan. On a CRF loan, it's a little bit higher than, that but it's still very attractive."

The CRF, which only partners with one certified development company in each state, is a nonprofit organization that is not affiliated with any governmental agency. Altman, who was one of its founders in 1988, had been assistant commissioner for Financial Management at the Minnesota Department of Energy and Economic Development. Altman had administered several loan programs designed to create jobs in energy-related industries, to promote energy conservation in public and private buildings, and to finance manufacturing facilities in small communities.

Over the years, CRF has provided funding in 46 states and Washington, D.C., and has provided a little over $1 billion to 154 lending partners across the country, according to Altman.

Altman said the goal of CRF is to bring jobs into low-income communities, and that 75 percent of its loans are in low-income or very low-income census tracks.

"We've been able to document about 36,000 jobs that have been added or retained in businesses that were otherwise going to be in trouble," said Altman.

CRF has a pool of New Market Tax Credits that it sells to subsidize a lower interest rate. It does not offer start-up loans. Like the SBA 504, CRF loans are only for investments in real estate or equipment and are in conjunction with a commercial loan and personal investment by the business owner. Typically a CRF loan is used to fill in a gap in the financing.

Use of the tax credit "lowers the rate, in our case, about 25 percent below what the market rate would be," said Altman.

According to a map of qualifying census tracts at, extensive parts of Greater Grand Rapids, Holland and Muskegon are in the so-called distressed zones that qualify for CRF loans.

Altman said some of the businesses helped by CRF loans are in the service or "lifestyle" industries, such as restaurants and travel agencies. Others are doctors' offices and dental clinics in areas that are underserved, he said. Sometimes properties acquired through CRF loans in depressed areas were "boarded up," said Altman.

"Small business, as you know, is the engine of job growth in this country, but it's usually two or three jobs at a time," he said.

In regard to restaurants, Altman said, "We look very hard at them, because there's a lot of risk associated with them. But most of the restaurants we have in our portfolio have performed. That might be because they are the old family-owned variety where people are really making a living off that restaurant, and they're committed to success."

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