Connecticut is growing a federal program offering small businesses alternatives to bank financing.
The Hartford Economic Development Corp. in March became the third U.S. Small Business Administration micro lender, providing loans of up to $50,000 to companies struggling to raise capital through bank lending.
"The idea is to serve the underserved market," said Sam Hamilton, executive director and chief executive officer of HEDCo. "Serving those that find it more difficult — especially in this Great Recession — to have access to capital."
The SBA microloan program offers term loans — usually around $13,000 — for companies to buy assets or enhance their business plans. The typical microloan recipients are home-based in low to moderate income areas with few, if any, employees
SBA provides the money but does not act as the lender, a role which instead is performed by an intermediary organization.
In addition to HEDCo, the other Connecticut organizations offering SBA loans are Hamden-based Connecticut Community Investment Corp. and Meriden-based Connecticut Economic Development Fund. Among the three agencies, the state has $2 million to loan annually.
Before HEDCo signed on as a lender, Connecticut had 20-30 microloans available to businesses per year.
"It is important that we have one in the Greater Hartford area," said Bernard Sweeney, SBA district director for Connecticut. "You can always use more."
HEDCo, which services 800-1,000 people annually, made its first microloan immediately after it was selected as a micro lender. The organization gave a $25,000, five-year term loan with 5 percent interest to salon Beauty by Dezign of Manchester.
Dana Hebert, owner of Beauty by Dezign, opened her business Nov. 23 on Birch Street in downtown Manchester. She said the microloan was vital for her to offer more retail products in the store and have all the necessary equipment to properly style her customers' hair.
"Getting the loan was quite easy and very helpful," Hebert said.
Hebert said she tried to sign up for a bank loan but didn't have the collateral necessary to receive the financing.
The $25,000 microloan from HEDCo helped lift her start-up business off the ground and market it to customers, Hebert said. Beauty by Dezign has since hired three employees.
"Business has been good," Hebert said. "I am always looking for new people, new talent."
HEDCo has committed to making a second loan under the SBA program and could provide another 10-15 by the end of the year, Hamilton said.
"There is ample opportunity and supply of individuals," Hamilton said.
The microloans tend to be hard to service, though, Sweeney said. The businesses that seek the loans typically need a lot of handholding and can be difficult to work with.
"You face the challenge of lower credit than what the banks would approve," Sweeney said.
The SBA's microloan portfolio has a high rate of delinquency, much higher than the average of all other SBA programs, Sweeney said. However, the default rate is slightly above the SBA average.
For companies that are successful in paying back their loans, the experience helps build their relationship with banks and other lending institutions, Sweeney said.
"It is a segue," Sweeney said. "It is good for them to prove they can make the payments."
HEDCo worked with Hebert for six months before providing the microloan to Beauty by Dezign. She came in through HEDCo's business resource center and seemed to have a solid business plan with a good chance of success, Hamilton said. The salon is in a downtown commercial district, has a solid core of customers and free parking.
"This person has 17 years of experience, has a good clientele base and had a good opportunity to move into the Manchester downtown area," Hamilton said.
For Hebert, the important part of the loan was HEDCo's continued support of her business after the money exchanged hands.
"They extended services after we finished the loan," Hebert said. "They've been very helpful."