When sales were hot two years ago, Ernest East had no idea how hard it would be to keep his business, Miz Lynn’s Pies, alive for its 10th anniversary this month.
After the recession cooled sales of his sweet potato pies, East ran from big banks to non-profit business loan programs for cash to tide him over.
The Mission SF Federal Credit Union was where he finally qualified for a loan of $6,500 with an interest rate he could handle. The credit union also helped him repair his credit rating. Since then, East has hired two more employees, bought equipment and added two store partnerships.
It’s for small business owners like East that President Barack Obama proposed the Small Business Lending Fund during his first State of the Union address on Jan. 27. But a month after the announcement, bankers, financial advisers and business owners are still waiting for the details of the program.
What is known about the program is that $30 billion of TARP (Troubled Asset Relief Program) funds repaid by big banks would be reinvested into small business loans administered specifically by community banks and credit unions. President Obama asserted in his speech that community banks are more supportive of small business. Right now community banks, which hold 20 percent of all banking assets, provide more than 50 percent of the nation’s small business loans, according to the White House.
But whether or not standards of qualifying for the loan would change under the Obama proposal, non-profit programs would also administer loans or any other assistance such as financial management training will be part of the plan is unknown.
“Obama’s announcement is exciting but we’re still waiting on those details to see who will be able to access those funds,” said Jose Quinonez, executive director of the Mission Asset Fund, a nonprofit dedicated to increasing working family’s access to financial services. His program also runs a service called La RED, the Resource and Development Fund, which connects low-income and immigrant residents with local programs that can help them sustain their business.
Quinonez warned that community banks are not necessarily sources of easy money. Financial accessibility depends on how each is run.
For most people, as in East’s case, he said the best bet for a low-interest loan and responsible banking is at a credit union such as the Mission SF Federal Credit Union, a federally chartered 501 (c) 1 nonprofit.
The credit union offers small business owners some of the lowest interest rates available in the neighborhood and reinvests profits into more inexpensive financial services for its members. The interest rates for both micro-loans of $300 to $5,000 and small business loans of more than $5,000 is 12.99 percent and can be as low as 7 percent with sufficient collateral, said Ivan Barriga, Outreach and Financial Education Director for Mission SF Federal Credit Union.
Barriga said he is hopeful Obama’s plan will help the credit union to assist more small businesses than ever before.
“I know with our credit union this is the first time we have the potential to access the TARP funds, so it’s a step in the right direction,” Barriga said. “For the dollars spent, we provide a great value to the community. The public will get a greater bang for their buck because their money is staying in the local community and benefiting everyone in it.”
But Tom Kelly, a national spokesman for JP Morgan Chase maintained the benefit of working with big banks like his is that they offer more “customization, convenience and value, which is what banking is all about.”
Of the difficulties many small business owners say they have getting loans from big banks, Kelly said, “If they can’t afford the loan, we aren’t doing them or us any favors by giving them one.”
But that’s why Sharon Miller, chief executive officer of the non-profit Renaissance Entrepreneurship Center, wants to see some of the Small Business Lending Fund go toward financial training for business owners who borrow.
The San Francisco-based Renaissance Entrepreneurship Center provides training, support services, resources and networks for new and low-income business owners at every stage of business development, Miller said. As such, the center can have a lasting positive impact on the economy, she added.
East, a product of Miller’s Renaissance Entrepreneurship Center, can testify that his money management skills have been crucial in sustaining his business.
“The economy–it hasn’t been very generous. But I’ve learned over the years how to keep things going and how profits go back into the business,” East said. “I have a dream and I have a goal to take [the business] from wholesale into retail and turn it into a 100-year-old tradition.”
More funding for non-profit loan programs such as the Opportunity Fund, which can take larger risks than most banks, could then help more low-income and start-up business owners revive the local economy, Miller said. The Bay Area-based Opportunity Fund offers its low-income, qualified applicants financial education, microfinance loans and affordable housing financing.
But community banks such as Mission National Bank—not to be confused with credit unions—are the only institutions guaranteed a role in the Small Business Lending Fund right now.
David Joves, chief executive officer of Mission National Bank, said he is optimistic that Obama’s proposal will help the economy recover mid-2011. Like Quinonez of the Mission Asset Fund, however, he remains a bit skeptical. The amount of restrictions tied to the new round of Small Business Administration (SBA) loans will be the defining factor in whether or not the proposal works for the small businesses that hold 85 percent of his bank’s loan portfolio, he said.
In last year’s America’s Recovery Capital (ARC) Loan Program, which gave small business owner’s short-term relief loans, Joves said, there were so many restrictions placed on loans that most applicants did not qualify for them. For instance, businesses with loans backed by the SBA before the stimulus bill was passed could not use the emergency ARC funding to cover payments on existing SBA debt. As a result, there was less incentive for banks to promote the program, he said.
As for the rest of the proposals President Obama made to help small businesses, such as lowering taxes for those who hire more employees, Joves said there isn’t enough consumer demand for most businesses to justify expanding staff yet.
What Joves said he would really like to see is an expanded Certified Development Company (504) Loan Program, which aids small business owners in buying, modernizing and expanding spaces for their business. The program cuts the borrower’s down payment from what Joves said is usually in the 30 percent of equity range to as low as 10 percent. This is done through the combination of a private-sector loan and Community Development Company (CDC) loan. The loan is fixed for a 20-year period at a low interest rate.
Though community bankers are waiting for money to come from the proposal, Barriga of the Mission SF Federal Credit Union said the proposal is at least offering small financial institutions free publicity. Proof of impact, he said, is the growing popularity of MoveYourMoney.info.
The web site, sponsored by The Huffington Post editor Arianna Huffington and supported by celebrities like the edgy political comedian Bill Maher and personal finance advisor Suze Orman, is calling on consumers to move their money from big banks to community banks. A New Way Forward, another web-based campaign with several San Francisco advocates, is also urging people “to break up with your bank.”