WASHINGTON The Small Business Administration has a new lending ally in its effort to serve poor areas: community development credit unions.
The SBA and the National Federation of Community Development Credit Unions have struck a partnership agreement that formally recognizes their shared goal of recharging distressed communities by helping out local businesses.
Seven community development credit unions are partners with the SBA in its popular 7a loan program, and the agencys officials would like to see the total rise to 50 under the trade group agreement.
Community development credit unions know how to make the kinds of loans that help small business in new markets, said Fred Hochberg, SBA deputy administrator. All they need is access to the backing that comes from SBA loan guaranties.
Credit unions have never been barred from the 7a program, which backs up to 80% of loan amounts up to $750,000, but restrictions on their business lending have discouraged borrowers from approaching them, an SBA spokesman said. Indeed, only a handful of the 7,000 lenders that have used the 7a program in the last five years are credit unions.
Walter Merkle, a specialist in small- and microbusiness lending at the credit union federation, said its members and the SBA complement each other. Community development credit unions focus on the same urban and rural low-income areas that the agency seeks to revitalize.
The SBA has realized that, historically and on a continuing basis, we are serving the needs of the disenfranchised, Mr. Merkle said. We are a natural distribution service for their efforts.
The SBA is also urging community development credit unions to tap a smaller program that makes loans of up to $25,000 to small entrepreneurs for any purpose except to buy real estate, make a down payment, or refinance debt. Through the Microloan Intermediary program, a lender essentially becomes a go-between for the SBA, lending government funds in underserved areas. Though the program was begun in 1993, community development credit unions have in recent months shown more interest in it as another way to cultivate weaker local economies through lending.
Alternatives Credit Union in Ithaca, N.Y., has made SBA-backed loans since 1996 but only recently became a microloan intermediary. The $31 million-asset organization has about 17 guaranty loans out, mostly in the $20,000-to-$25,000 range, said John Halleron, director of business lending.
The Microloan Intermediary program is really closer to our target market, Mr. Halleron said. These are the smaller-size loans that the regular banking industry doesnt want to get into.
He added that the community development system of lending emphasizes education. His credit union gives members a business development program that includes three 11-week sessions to help entrepreneurs develop a solid financial strategy.
The $11 million-asset Vermont Development Credit Union also incorporates investment training in its lending program, said president Karyl Stewart.
We have developed what we call counseling-based lending we work with borrowers to make them bankable, Ms. Stewart said. I think the SBA is trying to reach farther down the economic ladder in their work, and were an obvious tool for that.