November 28, 2011 | last updated June 4, 2012 12:30 pm

Nontraditional lenders gearing up | State initiative provides cash for small business loans on relaxed terms

Donna Wertenbach, chief executive officer, The Community Economic Development Fund
Mark S. Cousineau, president, Connecticut Community Investment Corp.

When Chris Runyan was looking for financing last year to open an entertainment store that allows customers to buy, sell, and trade video games, DVDs, and other electronics, he sent his business plan to 10 banks, heard back from five, but got money from none.

Without at least two years of strong financials, increasingly risk averse banks weren't interested in placing a bet on Runyan's small business concept.

"I went through three or four months of being led into different meetings, but no one wanted to loan me money," said Runyan, who lives in Milford. "It was really a waste of time and frustrating."

After the failed attempts, Runyan got in touch with the Connecticut Community Investment Corp. (CTCIC), a nonprofit lender that provides financing to businesses that don't qualify for traditional bank loans. After presenting his business plan to CTCIC officials, he found a willing partner, receiving a five-year, $35,000 micro loan to help him start his business — The Game X Change, which is part of an Arkansas-based franchise.

Just a year later, Runyan is preparing to open his third store in Wallingford. With locations already in Bridgeport and Orange, The Game X Change is a growing small business in Connecticut. And CTCIC financed all three store locations, providing more than $150,000 in loans to get the business on its feet.

Non-traditional lenders like CTCIC are playing an increasingly larger role in financing small and start-up businesses in Connecticut.

The nontraditional financial community, which consists mostly of nonprofit organizations that get their funding from a variety of sources, including banks, corporate donors and the government, is also being tapped to play a significant role in the state's new $100 million Small Business Express program, which is a major part of the job's bill passed last month during the special legislative session.

There are three statewide organizations — CTCIC, the Community Economic Development Fund (CEDF), and the Hartford Economic Development Corp. (HEDCO) — and several smaller lenders that operate on a regional or local level.

They differ from banks in that they provide capital to businesses that are considered too risky for regular lenders. These are start-up businesses whose owners may have blemished or no credit histories or existing companies that have seen their traditional lines of credit evaporate in recent years because of declining sales or hits to the value of their collateral, which no longer allows them to meet traditional debt ratios.

Mark S. Cousineau, the president of the Connecticut Community Investment Corp., which does primarily Small Business Administration lending, said demand for loans has increased significantly recently, even though many small business owners are still sitting on the sidelines. In particular, he said he's seen a lot more "gray hairs," or first-time entrepreneurs who were laid off from their job and are now looking to start a small business for the first time to earn a living.

Cousineau said CTCIC saw a 51 percent increase in loan volume this year for their SBA 504 lending program, which provides fixed rate financing for owner-occupied real estate and machinery and equipment. They also saw a 115 percent increase in loan volume for their microloan program.

"It's reflective of the economy," Cousineau said. "There are very few sources of capital for startup businesses."

The nontraditional community will typically charge higher interest rates than banks, but also be more flexible on loan terms and products.

The Community Economic Development Fund in Meriden, for example, will offer 10-to-15 year term loans to small businesses, compared to five- to seven-year loans typically offered by traditional banks.

Donna Wertenbach, the nonprofit lender's chief executive officer, said CEDF also customizes loan products around the needs of individual businesses and is willing to modify loans or work with borrowers who experience difficulties. That could mean using graduated payment or amortization schedules and offering borrowers interest-only periods to get them through slow sales periods.

CEDF offers working capital and lines of credit of up to $250,000. Wertenbach said they do about $3.5 million in loans a year, with the average loan being about $50,000 to $60,000.

"Small businesses need more flexibility because they are living in a new world," Wertenbach said.

Besides loans, Wertenbach said the other key difference between banks and nontraditional lenders is the consulting role they play. Wertenbach said CEDF employs business consultants who meet with borrowers to assess their business needs and suggest ways to improve.

That includes problem solving and troubleshooting as well as connecting them to new opportunities or resources that may be available from the state or other organizations.

HEDCO, which was recently approved as an SBA micro lender, provides cash management and back office training programs and also has incubator space for start-ups.

That consulting role is key, Wertenbach said, because it increases the bankability of borrowers and reduces loan defaults. In 2010, Wertenbach said her organization had a charge off rate of 6 percent.

"The difference is banks give you the money and it is your responsibility to manage everything else that comes your way," Wertenbach said. Wertenbach said the nontraditional community is not in competition with regular banks. In fact they have a close relationship.

CEDF, for example, gets $21 million in equity investments from Connecticut banks.

When banks have customers who no longer qualify for traditional loans, they will often refer them to organizations like CEDF. And the goal is for the borrowers to come out the other end as established, stable businesses that can once again become bankable.

"The goal is for us to serve as a pipeline to traditional lenders," said Sam Hamilton, the executive director of HEDCO.

Hamilton said his organization has also seen loan volume take a huge jump in recent years, from both startups and established companies.

Prior to the downturn, HEDCO was making about $2 million in loans annually. Now the volume is approaching $4.5 million, Hamilton said.

The availability of credit for small and start-up businesses has been a major issue since the financial crisis of 2008, which caused banks to tighten their lending standards. It's one of the issues that spurred state lawmakers to pass a comprehensive $100 million Small Business Express funding program during the special jobs session.

The program includes loans, forgivable loans and matching grants for small companies.

Although the details haven't been finalized, nonprofits like CEDF and CTCIC will likely do a significant share of the lending.

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