April 11, 2011 | last updated June 1, 2012 10:00 am

Micro-loan program faces major cuts

Mark Cousineau, president of Connecticut Community Investment Corp., looks at t-shirt made by LiveProud, one of the firm that benefitted from the micro-loan program.
Mark Cousineau, who is the regional administrator for the micro-loan program, says the core problem is that the SBA doesn't understand the business model.

Mark Cousineau, who is the regional administrator for the micro-loan program, says the core problem is that the SBA doesn't understand the business model.

A 20-year-old micro-loan program that's been a lifeline for Connecticut entrepreneurs launching everything from child care centers to pilates centers, food services to chiropractic practices, is on the chopping block as Congress wrestles with ways to pare the federal budget.

The national program, sponsored by the Small Business Administration, stands to have its funding slashed almost in half from $25 million to $13.8 million in the budget that begins Oct. 1.

That's enough to get the attention of the program's regional administrator and a Quinnipiac University business school class. They're speaking up in defense of the program that provides an average of $22,522 in funding to people who are otherwise "unbankable."

Mark S. Cousineau, president of the Connecticut Community Investment Corp. in Hamden, administers the loans in Connecticut and parts of Rhode Island. He said the problem lies not with the White House, but within the SBA, which he said proposed the budget cuts without fully understanding the program's machinations.

"If they fund us to the 2010 amount, we're talking about $25 million to keep a program healthy across the country. It's a ridiculously small amount of money," Cousineau said.

He described it as unique among a palette of SBA services because it is the only program that combines counseling and loans together. Other SBA programs, like the Senior Core of Retired Executives (SCORE), offer one or the other.

"There is a huge disconnect. The SBA doesn't understand our business model," Cousineau said. "We have to do battle to fight to keep the program alive."

CTCIC is a private, non-profit economic development lender. It uses non-traditional collateral and offers a flexible loan structure. CTCIC also provides business counseling, training, and technical assistance to help borrowers improve their capacity to succeed in business before and after funds have been disbursed.

"It's very much grant driven and the SBA does not see that," Cousineau said.

Xiaohong He, professor of international business in the Quinnipiac University School of Business, explained the SBA authorized the micro-loan program in 1991. After 20 years, there are 165 SBA intermediary micro-lenders in the country that use money provided by the U.S. government budget to fund small entrepreneurs. Many of these borrowers were denied by commercial banks. Among the goals is providing ongoing technical assistance to these new borrowers as they grow and encounter challenges, they can adapt to changing market conditions, and eventually graduate to "bankable" class.

Charlie Bogoian, a co-founder of LiveProud, a Bristol clothing manufacturer that specializes in making clothes from recycled consumer goods, said: "The micro-loan was the first major step to running our business."

But it was more than just the money that got the company off the ground. Bogoian said. LiveProud spent a couple months honing its business plan with advisers from CTCIC. "We can bounce every idea off of them," he said. "The counseling is important. It's a third-party opinion… that helps make sure the decisions you make are all encompassing."

The success of the clients can work against CTCIC. Clients that find success early on and are responsive to counseling are frequently no longer considered a start-up and can receive traditional funding in 18 months.

"The cream of our portfolio gets skimmed off every 18 months," he said. "It's a very labor intensive model that we have."

A representative of the Connecticut SBA office had no comment on the funding cuts.

One thing that could spare CTCIC fiscal pain this year is a cache of unspent federal stimulus funds.

Once again, Cousineau minces no words when talking about the SBA. "The stimulus money came very late in the process. The SBA really botched it. They screwed up so badly we were allowed to carry [the funds] over until September 2011." That money will be used to cover the funds for technical assistance to borrowers that is slated to be slashed.

"We'll have enough to cash to survive at the same level we did," he said, until the next federal fiscal year starts. "In the short term, we're OK."

Cousineau said micro-loans are "costly to put on the books." Interest rates outside of the U.S. approach as high as 40 percent, he said. "We charge about credit card rates — 8.8 percent. These are by definition unbankable deals," he added.

The current loan portfolio at CTCIC for about 80 borrowers is about $2 million, which earns the nonprofit about $140,000 annually but chunks of that are eaten up by a requirement for a 25 percent match to SBA grants for counseling. The group also annually writes off about $50,000 to $60,000 in bad debt.

The micro-loan program also has the problem of borrowers being under capitalized, Cousineau added. "When a loan does go bad, we're sunk but we're also careful about who we lend to," he said, One of the requirements for a loan of more than $35,000 is the borrower must have been denied bank credit.

CTCIC has reached out for private support from banks including TD Bank, Webster and Bank of America. "This was the first time we went out," Cousineau said.

The SBA 504 program that offers 90 percent fixed rate financing for owner-occupied real estate and machinery and equipment also helps support the micro loan program. "It's cash flow positive," Cousineau said. "If we were a single [micro-loan] entity, we'd be dead."


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