Smart Business: the Capital Access Program (Finance)

[Finance]

Smart Business: The Capital Access Program

Hed: Need money? Consider the state-run CAP programs.

Deck: Small business owners and entrepreneurs can get help raising funds.

Summary: The Capital Access Program, a little-known government initiative, is making it easier for higher-risk companies to raise much-needed cash.

Pull Quote: "The CAP loan not only provided us with needed capital, but was an important endorsement for our business." -- Malia Mills, president, Malia Mills Swim Wear

New York entrepreneur Malia Mills launched her bathing suit company in 1992, with the financial support of friends and family. Within a year, her Malia Mills Swim Wear line had attracted the attention of Sports Illustrated magazine, which featured supermodel Kathy Ireland wearing a MMSW bikini in its swimsuit issue, calendar and video.

Encouraged by this reception, Malia Mills incorporated in 1994, took on two partners and was soon being touted by fashion magazines worldwide – as well as shipping to 70 stores. Nonetheless, like so many other fledgling companies, Mills' startup struggled with cash-flow problems, and found conventional loans hard to come by. Finally, in the fall of 1998, Mills turned to the New York City Capital Access Program (CAP), which enables participating banks to make loans that carry a higher risk than conventional loans. And she got what she wanted.

A $50,000 CAP loan, part of a larger Letter of Credit, helped Malia Mills hire four additional full-time employees, buy more fabric for production, and open a 350-square foot boutique north of Manhattan's Little Italy. The company doubled its reserves with increased retail business through its store, Web boutique and catalogue. Today, Malia Mills has 12 employees, stores in New York, Los Angeles and Miami, and a new line of lingerie. "The CAP loan not only provided us with needed capital, but was an important endorsement for our business," says Mills.

Historically, entrepreneurs have relied on friends, relatives and other "angels" to finance their small businesses and startups. The less fortunate resort to high-interest alternatives like credit cards or private loans. Why? Because owners of small businesses seldom meet a bank's criteria to qualify for a regular loan – either because they are short on collateral or have an "iffy" cash-flow, says Pete Peterson, director of the CAP program at Branch Banking & Trust (BB&T) in Winston-Salem, N.C. That's where CAP can help. The program -- which has been adopted in various forms by 20 states and two municipalities -- provides an incentive for banks to lend money to new or thinly capitalized companies based on a kind of insurance concept, says Kathleen Tompkins, CAP program manager for Illinois' Department of Commerce & Community Affairs.

Specifics vary from state to state and bank to bank, but the basic idea works like this: When a participating bank offers a CAP loan, a special loan-loss reserve is set up under the program to cover potential losses. Each time a bank makes a CAP loan, the bank and borrower make a combined contribution to the reserve fund. This fee is typically between 3 and 7 percent of the borrowed amount. The state then makes a matching contribution, which essentially insures against losses in the program and allows banks to take on riskier loans.

CAPs allow participating banks broad discretion: "That’s the good thing about the program," says Peterson. "It lets the bank do everything: the underwriting, the credit analysis. The state doesn’t get involved. CAP gives the bank a lot of discretion and gives the client the ability to shop banks for better deals." Even the loan rate can be negotiated, depending on the borrower's relationship with the bank.

"This is strictly a market transaction between the bank and the borrower," says Tompkins. "We count on the diligence of the bank."

Getting With the Program How can entrepreneurs and small business owners capitalize on the CAP program? "By using a bank that focuses on all aspects of small business lending," says Lynn Harton, small business banking manager and executive VP at BB&T. "The best option for the client is always going to be conventional -- more flexible terms and better rates. So the first question is: How active a conventional business lender is your bank?"

Harton suggests asking CPAs, attorneys and other small business owners for recommendations. Not all loan requests fit conventional underwriting terms, however. Maybe the history of profitable operations isn't what the bank would like to see, or maybe the collateral coverage is less than bank policy. "Consider how creative your bank will be in addressing these issues and finding a way to make the deal work for you," he says.

For instance, Peterson frequently uses CAP to cover collateral shortfalls. "If you're getting a $100,000 loan and only have $80,000 in collateral, I can do a loan for $100,000 and just enroll $20,000 in CAP," he says. "That way, the client only has to pay the fee on the $20,000. We have collateral for $80,000 and could go into the reserve account for the $20,000. We do that a ton."

Indeed, for many people, CAPs are the way to go. According to a report released by the Department of the Treasury in January 2001, cumulative CAP lending nationwide, from the program's inception in 1986 through June 2000, totaled over $1.5 billion. The average loan size was $60,624.

And the program continues to gain momentum, with Florida launching its CAP in 1999, Louisiana and Maryland in 2000, and Hawaii slated for 2001. The Department of the Treasury notes that CAPS effectively reach minority-owned businesses along with low- and moderate-income communities, enable jobs to be retained and created, reach businesses not reached by other small business-lending programs and fill a void in the private financing market for start-ups and businesses that need working capital.

Nonetheless, some people still feel that banks are too cautious. "What we're not liking is that our default ratio is 1 percent," says Carolyn Perry, director of the North Carolina. Microenterprise Loan Program. "We think that's bad: that means that only 1 percent of the loans have defaulted. That means that you don't really have any high-risk loans or you don't have enough high-risk loans. We built it in to be at 5 percent. We feel entrepreneurs and startups should have more opportunities, that we should reach deeper."

Brave New Loans The beauty of CAP is that it's flexible and non-bureaucratic, says Tompkins. "The borrower doesn't have to fill out any application forms. They don't have to wait for approval. Under a Small Business Administration (SBA) loan, by contrast, you're filling out a separate application and you have to wait for the approval of the federal government before they can decide to do the loan and give you the money."

Not only is there a surprising lack of paperwork, but results can be immediate. Last September, with the support of BB&T, Donna Walker took out two CAP loans totaling $200,000 to acquire a business. "I had the money within days and it was fabulous," says Walker, who heads DLS Engineering, a marine engineering consulting firm in Virginia Beach, Va. "I needed something very fast because the owner of that business said he had two options," she says. "Whoever had their money on the table first, won. The pressure was tremendous."

But CAP is no panacea. Carol Mills, business manager at her sister Malia's swimwear company, advises entrepreneurs to be wary. "Remember, anything you do as a last resort may ultimately come 'round to bite you," she says. "We're a chronically under-capitalized business and a loan allows you to get into dangerous territory. The cost of that money has been shocking, a big drag on our bottom line. People should really look at the cost of what the assistance will bring you."

"You really do need to look at those costs," says Malia Mills. "Is it just going to keep you surviving? Or is it really going to get you somewhere?"

Related Links Branch Banking & Trust Co. Illinois Department of Commerce & Community Affairs DLS Engineering Associates Malia Mills Swim Wear New York City Economic Development Corporation New Hampshire Business Finance Authority North Carolina Rural Economic Development Center

SOURCES

Lynn Harton Small Business Banking Manager Executive Vice President Branch Banking & Trust Co. 150 S. Stratford Rd., Suite 200 Winston-Salem, NC 27006 336-733-3438 phone

Also: Pete Peterson Branch Banking & Trust Co [email protected] Director of CAP Program

Malia Mills President Malia Mills Swim Wear 150 West 28th Street Studio 1003 New York, NY 10001 Phone: 212.563.4006 [email protected]

Deborah Morin VP Commercial Lending Bank of NH 143 N. Main St. Concord, NH 603-229-5909 [email protected]

Carolyn Perry Director of NC Microenterprise Loan Program NC Rural Economic Development Center 4021 Carya Drive Raleigh, NC 27610 919-250-4314 [email protected].

Kathleen Tompkins Capital Access Program manager Illinois Department of Commerce and Community Affairs Business Finance Division James R. Thompson Center 100 West Randolph, Suite 3-400 Chicago, Illinois 60601 312 814-2315 [email protected]

Donna Walker, PE President / Owner DLS Engineering Associates, Inc. Haygood Executive Center 4665 Haygood Road Suite 401 Virginia Beach, VA 23455 757-363-0800 [email protected]