“Water, water, everywhere, nor any drop to drink” is a line from the poem, “The Rime of the Ancient Mariner,” written by Samuel Coleridge and published in 1798. Unfortunately, in 2021, it aptly sums up the situation that has been facing small businesses in Hampton Roads when it comes to access to capital. While there are funds available for lending, there is a paucity of resources available for smaller and/or startup businesses.
Prior to 2012, the region’s small-business owners were able to access capital in amounts ranging from $500 and up to $25,000 under the Small Business Administration Microloan Program. This program, managed by the Portsmouth-based Center for Community Development had a highly successful SBA guaranteed microlending program that coupled access to capital with technical assistance training and counseling by the Small Business Development Center. Regrettably, due to financial difficulties not related to its microloan program, the center had to be disestablished. This took away a vital tool for the region’s small-business owners.
As a rule of thumb, financial institutions usually do not lend to borrowers who are seeking a loan of less than $25,000 — and, in some cases, less than $50,000. Simply stated, the costs of underwriting, making, and managing a portfolio with loans of less than $50,000 are higher than the funds realized from the interest and fees charged for these loans.
At this time, there is only one source for microloans for the region and this is the Virginia Small Business Financing Authority’s SWaM Business Microloan Fund. In order to qualify to apply for the loan, a business has to have been in operation for at least two years. Loans in excess of $10,000 and up to $25,000 must receive technical assistance from the SBDC or another acceptable counseling agency. The two-year requirement automatically disqualifies startup or early-stage businesses.
SBA microloans are smaller loans funded by the Small Business Administration and managed by an intermediary who borrows the funds from the SBA and then lends them out in accordance with the program’s guidelines. While the maximum amount that can be borrowed is $50,000, in 2020, the average microloan was $14,434, and the average interest rate charged was 6.5%. In addition, it is interesting to note that 30% of these loans were made to startup business ventures. These loans can be used to purchase inventory, supplies, furniture, fixtures, equipment and provide needed working capital. Microloans cannot be used to pay off other existing debt or purchase real estate.
Interest rates vary depending on the intermediary lender but are generally between 8% and 13%. Although the average 2020 interest rate was 6.5%, this was during the pandemic and the requirement to keep businesses afloat probably influenced the interest rate charged. Loan repayment terms vary according to several factors. These include the amount, planned use, lender requirements, and needs of the business borrower. The maximum repayment term allowed for these loans is six years.
The COVID-19 pandemic spurred the migration of businesses and employees from the traditional office setting to a home-based location. While the primary intention was to maximize safety while maintaining productivity, it also changed the paradigm as people realized the advantages of such a hybrid working arrangement.
Additionally, many individuals opted to leave the corporate world and strike out on their own as entrepreneurs and small-business owners. Melissa Davidson of the York County Department of Economic Development did award-winning research into this completely overlooked segment of the county’s economy and found that home-based business owners, across a wide spectrum of pursuits, accounted for over 50% of the business licenses issued by the county. Regrettably, access to capital for many of these businesses is not available due to the lack of a microlender in the region. This inability to access funds at micro levels by our local business owners is indeed the “albatross around our neck.”
We have the ability to have this albatross fall from our neck by coming together as a region and reestablishing a functioning and viable micro-lending program. The region’s political, financial and business leadership must take steps to ensure that our small businesses and our economy have access to all the tools needed to succeed.