Summit Bancorp is one of the first banks to participate in the Small Business Administration's revamped microloan program, which issues loans to start-up businesses.

The $22 billion-asset Summit, N.J., bank lent $578,926 to the Greater Newark Business Development Consortium to make loans of less than $25,000 each to small businesses.

"We hope that people who are customers of the microloan program will eventually become customers of the bank," said Michael Land, Summit vice president for government guaranteed lending.

The pilot for the recently revamped 7(m) Microloan Program is designed to make more capital available to entrepreneurs because the SBA-guaranteed loans come from the bank rather than the federal agency.

The 10-year loan functions as a revolving credit line for the first five years. The loan has an interest rate based on the five-year Treasury rate.

Under the microloan program, intermediary lenders such as the Greater Newark Business Development Consortium set the credit and collateral requirements.

The SBA and the intermediary lenders help the small-business owner develop business and marketing plans, and can provide demographic research about particular areas or industries.

"It's an easier environment for people that haven't borrowed from a bank before," Mr. Land said. "It's difficult for a bank to do start-up loans of less than $25,000."

With the loan structured as a revolving credit line, the intermediary lender pays interest only on the amount lent to entrepreneurs, which reduces the intermediary's interest expense.

Previously, the money for the microloans came directly from the SBA and the intermediary lender paid interest on the entire loan amount.

The microloan fund can weather cutbacks in the SBA's budget because the money comes from the bank rather than the federal agency, said Harry Menta, economic development specialist for the SBA's New Jersey office.

"This ensures the program will be available as long as the SBA will back the loans," Mr. Menta said. "It's more self-sufficient with the private sector involved."

Since SBA created the microloan program in 1993, the Greater Newark Business Development Consortium has approved 73 SBA-guaranteed microloans totaling $1 million.

Nine other banks, in addition to Summit, will issue loans to 19 local economic development groups as part of the pilot program.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.