The Best-Kept Secret in Small Business Lending?

By Jessica Milano

We all know that banks are vital providers of small business credit because of their community engagement, extensive local market knowledge and deep customer relationships. All too often, though, an otherwise strong small business is unable to qualify for a loan due to a collateral shortfall, short credit history or the lingering effects of the recession.

However, an innovative program run by the U.S. Treasury Department funds state credit support programs, such as loan guarantee and loan participation programs, which give lenders an easy-to-use tool to bring borrowers’ applications in line with credit policy. The State Small Business Credit Initiative provides funds to individual states and municipalities to use for financing small businesses that do not qualify for credit in more traditional ways.

In 2014, Ceiba College Preparatory Academy, a public charter school in California’s Pajaro Valley Unified School District, faced an outdated campus, a growing student population and a need to relocate and expand. Since its launch in 2008, the academy’s campus had been secured by a series of one-year leases. This practice left the academy without collateral, a difficult position for a school looking to relocate and expand. Due to the academy’s not-for-profit status, it could not elect a personal guarantor to support the loan necessary for its relocation.

Tom Brown, co-founder and CEO of the academy, turned to Santa Cruz County Bank in Watsonville, Calif., to help navigate the academy’s funding challenge. Together, they determined the academy could secure funding through the California State Small Business Loan Guarantee program (SAFE-BIDCO), which had been granted federal funds from SSBCI.

Working with SAFE-BIDCO, the academy was able to secure a guaranteed $2.5 million in support of a $3.3 million loan from Santa Cruz County Bank. With the support of these funds, the academy transformed 28,000 square feet of the new facility’s warehouse space, added a 7,000 square foot mezzanine and created 21 classrooms, an assembly and cafeteria space.

In Washington, Sunbanks Resort serves more than 60,000 visitors per year on its 197 acres and 5,000 feet of waterfront on Banks Lake in Electric City for camping, hiking and watersports, along with a restaurant and general store.

To increase the number of summer guests, Sunbanks Resort owner and veteran Patrick Welton needed to replace his old wells with a reliable water source, upgrade the marina and add more lodging. However, with the full-service resort operating as a seasonal business and residing on leased state land, traditional bank financing was difficult to obtain.

First Sound Bank in Seattle used funds made possible through Washington’s Small Business Credit Initiative to lend Welton the capital he needed to install a 3,000-foot water line from Electric City and add new beach front units and a 50-slip marina. Welton was also able to leverage $5 million in additional public and private investments. Within the next year, Sunbanks Resort projects that 19 new full-time jobs will be created or retained as a result of the financing.

Community banks are the most active participants in the SSBCI program. Of the $800 million in lending supported by the program, 84 percent was lent by banks with less than $10 billion in assets, and 58 percent by banks with less than $1 billion in assets. To date, SSBCI has helped more than 12,400 small businesses in a diverse range of industries across the country—from retail trade and manufacturing to accommodation and food services—access $6.4 billion in private-sector small business lending or investments that wouldn’t be possible without the program’s support.

SSBCI differs from the Small Business Administration and other federally backed loan programs in that each state is responsible for designing and implementing its own small business funding model. This flexibility gives each state the authority to structure a program best suited to its economic needs to generate the greatest economic growth. Participating in the SSBCI program has allowed banks of all sizes to engage in more economic development activities that strengthen small businesses that may not qualify under their standard underwriting requirements.

The program’s success in spurring private lending and investing will continue because funds stay with the states in perpetuity. To build on these efforts to provide access to capital for small businesses, the administration and members of Congress have proposed extending the program with an additional $1.5 billion in funding—continuing a successful partnership.

Jessica Milano is deputy assistant secretary for small business, community development and affordable housing at the U.S. Treasury Department.