At the close of 2009, Connecticut banks had more than $51 billion in loans outstanding, with quarter-to-quarter loan fluctuations regularly topping $100 million.
In early April, the Legislative Commissioner”™s Office released a final draft of a bill proposed by Gov. M. Jodi Rell, that among other provisions would allow the state to borrow $100 million, in turn lending that money to small businesses.
“One of the base jobs that we face after the financial crisis is to change the thinking of the public in small business,” said Howard Pitkin, commissioner of the state Department of Banking, testifying in support of the bill after it was introduced. “It”™s OK to believe that tomorrow is going to be better than today and that ”¦ it”™s OK to go out and borrow and fund your business needs. And it”™s also OK for the public to resume a normal spending pattern. Until we do that, it”™s going to be very difficult to turn this recession around.”
Taking its inspiration from the U.S. Small Business Administration”™s guaranteed loan programs, the proposed Connecticut program is meant to get money into the hands of businesses that otherwise are having difficulty qualifying for loans ”“ particularly in what many see as a stricter lending requirement.
Not all banks choose to participate in SBA”™s lending programs, however, due to what many see as an onerous application process.
Andy Markowski, Connecticut state director for the National Federation of Independent Business, said the drop in home prices is affecting many small businesses due to the common practice of entrepreneurs securing capital using their houses as collateral.
Businesses are also having trouble securing loans due to sharp drops in revenue that has banks skittish, Markowski said.
The bill also has the support of the Connecticut Business and Industry Association, which has vociferously opposed many other proposals for new spending.
The bill would authorize the state to raise $100 million this year and next via the issuance of bonds, with $75 million reserved to guarantee up to half of commercial loans made by banks in amounts ranging between $500,000 and $3 million.
If banks still do not lend the money, the state Department of Economic and Community Development would be empowered to use the pool for direct loans to companies.
“We project that the $100 million that we have put forward ”¦ could leverage an additional $400 million,” said Joan McDonald, DECD commissioner, testifying in support of the bill last month. “The reason the $75 million is structured as a loan guarantee is ”¦ that would not compete with the banks. It would give them that extra assurance (for) some of these businesses that may be right on the cusp.”
McDonald estimated that as many as 20 percent of borrowers under the program would default on their loans. He did not speculate on how much of that amount the state might be able to recoup.
“Part of the issue is ”¦ lessening some of the collateral requirements,” McDonald said. “You lessen the collateral requirements, you”™re taking on a little bit more risk.”
McDonald said DECD was the logical agency for the job instead of the Connecticut Development Authority, which administers a sufficient number of loan programs that it is regarded informally as “the state”™s bank.” Due to CDA”™s charter requiring it to remain self-supporting, it does not have the same wiggle room to allow deferred payments on troubled loans, a scenario DECD does not face.
The bill”™s remaining $25 million would be lent directly to businesses in the form of microloans amounting to less than $500,000 ”“ and in some cases under $20,000.
“Microlending is a type of business banks ”¦ are not typically interested in,” Pitkin said. “Hopefully this program will help businesses of 100 employees or less, and may include very modest credit requests for sole proprietorships, small partnerships, and corporations.”
“Psychology is a huge part of how we do economically and this sends out a huge, resounding message to the marketplace that Connecticut is here to help,” said state Sen. Scott Frantz of Greenwich. “It”™s too bad we can”™t do this overnight and we have to go through the legislative process ”¦ but it really does send out the right kind of message: we”™re here to help.”
