Easy access

Entrepreneur, Nov, 1998 by David R. Evanson, Art Beroff

The way O. David Dickson had it figured, his five-vehicle ambulance company needed a new headquarters station in Warrenton, Oregon, if he was going to cover his corner of the state properly. So when the right facility hit the market in late 1996, Dickson jumped at the opportunity to buy it. Not only did the available facility offer space for a sixth ambulance and crew, but it also had ample room for a dispatch center and training facility.

There was just one hitch: money. The price of the facility was $200,000, and when Dickson put everything he had on the line, his bank would only lend him $140,000. "If I couldn't get the other $60,000, I'd lose the deal," Dickson, 53, recalls. "There were two other buyers behind me."

Dickson got his windfall from a little-known lending source, the Capital Access Program (CAP), now operating in 20 states. By taking advantage of Oregon's CAP, Dickson was able to coax another $60,000 out of the Bank of Astoria and, with his war chest assembled, completed the deal. Today, Medix Ambulance Service Inc.'s six ambulances operate round-the-clock to cover emergencies in Clatsop County.

NOTHING TO IT

The Capital Access Program got its start in Michigan in 1986, according to Dave Dahlin, senior finance officer with the Oregon Economic Development Department. Oregon's program was initiated in 1991, he says, and, since that time, has created or saved about 2,000 jobs. Since it began, Oregon's CAP has been the catalyst for about $53 million in loans - loans to small businesses, says Dahlin, that may never have been made without the program.

Here's how the program works: When making a CAP loan, the bank and borrower each pay an upfront fee of between 1.5 and 3 percent of the loan - for a total of 3 to 6 percent. This fee is similar to an insurance premium. The exact percentage is set at the discretion of the bank, and in practice, the bank passes its portion of the fee on to the borrower by financing it with loan proceeds.

The lending bank deposits CAP premiums into a reserve account it holds. The state then deposits matching funds into the bank's CAP reserve account. This way, the bank creates a loss reserve that's equivalent to 6 to 12 percent of total CAP loans.

When compared to overall loan-loss experiences with CAP loans, these loss-reserve percentages are compelling and indicate why the program works. For instance, according to Dahlin, with the $53 million in loans made under the CAP program in Oregon, the lenders experienced a loss rate of 6.6 percent, or about $3.5 million dollars. But because of the loan reserves of between 6 and 12 percent of the total money lended, the banks were able to fully recover their losses.

So what's the overall result of protecting lenders against losses in this fashion? More small-business loans, says Dahlin. "The program has made a large number of loans available that would not be available otherwise," he says.

Maybe so, but they come with a price. In the end, it's the borrower who foots most of the bill in the form of a higher interest rate. The following example shows how:

Assume you borrow $50,000 for five years at a 9 percent interest rate. Your monthly payment on the loan is $1,037. Assume, however, that you pay a CAP fee of 3 percent, or $1,500; the bank also pays a CAP fee of 3 percent, or another $1,500, which it then charges you. If the $3,000 in fees is taken out of the loan proceeds, then as the borrower, you don't really have $50,000 to work with. In truth, your loan proceeds are really $47,000. But because you're making monthly payments of $1,037 on $47,000 worth of usable loan principal, your effective interest rate is really 11.64 percent.

The situation doesn't change much if you borrow $53,191 to realize net proceeds of $50,000 after CAP fees. Here the effective interest rate turns out to be 11.68 percent, an increase of 29.8 percent over the initial interest rate of 9 percent.

"It's expensive when you look at it this way," says Dahlin. "Because [most] businesspeople will borrow at the lowest rate possible, these higher rates are truly for those who could not get a loan without the program."

A BETTER PLACE TO BE

Slightly higher interest rates notwithstanding, most state economic development professionals, as well as entrepreneurs, agree that programs such as CAP are an efficient way for the government to help businesses get loans - especially when you consider there is almost no bureaucratic intervention in a CAP loan. In fact, Dahlin says, all that participating banks in his state need to do is fax him a one-page application, which enrolls each new loan in the program. "That's all there is to it," he says - assuming the bank doesn't call eligibility into question.

One of the reasons the CAP loan process is so simple is the participating government agency has very little at risk. It's very different from SBA-guaranteed loans, where the government is responsible for 75 to 80 percent of a loan's value. It's much more palatable when the government has little risk in promoting credit. According to Dahlin, for every dollar that the state of Oregon puts up for CAP reserve funds, another $23 comes from private sources.