FOR COUNCIL MEETING OF: AGENDA ITEM NO:. MICRO ENTERPRISE LOAN PROGRAM

Transcription

1 FOR COUNCIL MEETING OF: AGENDA ITEM NO:. March 22, (g) TO: THROUGH: FROM: SUBJECT: MICRO ENTERPRISE LOAN PROGRAM ISSUE: Shall the City Council adopt the Micro Enterprise Loan Program Guidelines? RECOMMENDATION: Staff recommends the City Council adopt the Micro Enterprise Loan Program Guidelines. BACKGROUND: In May 2009, the City Council approved the five year Consolidated Plan, which identified Economic Development as a number two priority in our community: Because this is a high priority, in the Annual Plan, $102,130 of Community Development Block Grant Funds (CDBG) was allocated to fund a micro loan program (Program). A program of this type is highly sought after by start-up businesses and entrepreneurs because funding programs for start-up businesses are limited and expensive given the risks associated with this type of financing. Because this type of loan program is the first for the City, it is being proposed as a pilot program. This will allow an opportunity to determine the impact of the program on meeting the identified need for small business capital in our community. A copy of the Program Guidelines is attached (Attachment A). The Program was developed in collaboration with organizations that have experience in underwriting, developing, and administering similar loan programs throughout Oregon. Development of the Program included research into the best method for administration of a micro loan program, keeping in mind the primary program goal of creating successful, sustainable small businesses in Salem. FACTS AND FINDINGS: The Program policies and procedures are designed to give the recipients the highest probability of being successful. A key element of the Program is the requirement that Micro Enterprise Loan Program Page 1 of3 March 2, 2010

2 an applicant successfully complete a course on owning/operating a small business. In addition, we have partnered with two organizations that currently provide educational programs in our community for start-up businesses to provide technical assistance on behalf of the City in completing the loan application and accompanying application materials. The terms were developed to encourage business success and sustainability. The loan terms are very favorable, but the underwriting criteria are structured to minimize risk to both the City and borrowers. The following highlights key elements of the Program: Loan Amount: Applicant Criteria: Eligible Use of Loan Funds: Loan terms Interest Rate: Loan Underwriting: Technical Assistance: $2,000 to $10,000 Businesses with five or fewer employees Business owner(s)/applicant must make 80% or less median family income Working capital, equipment, and machinery Up to 60 months 5% Step 1 - Loan underwriting will be provided by the Council of Government s through an existing Intergovernmental Agreement. Step 2 - Loan Committee review/recommendations to Director Step 3 - Director of Urban Development Department loan approval Step 4 - Loan Closing Technical assistance in loan application preparation will be provided by MERIT and Interface Desired Outcome of Loan Program At least ten income-qualified entrepreneurs and/or small business owners located within the City of Salem will receive loan funds to sustain a business. Expand the potential for research and development for the creation of innovative products. Wealth creation for small business owners. Better informed entrepreneurs and/or small business owners in all elements of owning and operating a business. Micro Enterprise Loan Program Page 2 of 3 March

3 Next Steps: Upon receipt of Council approval, staff will finalize loan documents. Amend IGA with the Council of Governments to include underwriting for Micro Enterprise Loan Program. Amend subrecipient agreements with MERIT and Interface to include providing technical assistance to Micro Loan applicants. Attachment A: Micro Enterprise Loan Program Guidelines Report Prepared by: Rena Peck, Federal Programs Manager G:IURBANDEVlADMINISTRATIONIFinal Council Staff Reports\2010lMAR 221MicroioanlMicroLoan staff report.doc Micro Enterprise Loan Program Page 3 of 3 March 2, 2010

4 MICRO BUSINESS LOAN PROGRAM GUIDELINES CITY OF SALEM URBAN DEVELOPMENT DEPARTMENT 350 COMMERCIAL STREET NE SALEM, OR ATTACHMENT A G:\URBANDEV\ADMINISTRATION\Final Council Staff Reports\2010\MAR 22\Microloan\MicroloanPolicylOfeblO.doc Rev.3/1Q

5 CITY OF SALEM MICRO BUSINESS LOAN PROGRAM PROGRAM DESCRIPTION The City of Salem Micro Business Loan Program is designed to assist entrepreneurs and small business owners within the City of Salem to access small loans and gap financing to ensure that those businesses start, grow, remain sustainable, and succeed. Funds for the loan program are assessed from the City's allocation of Community Development Block Grants (CDBG) program to assist persons owning or developing a microenterprise. A microenterprise is defined as a commercial enterprise that has five or fewer employees, one or more of whom owns the enterprise. The City of Salem Urban Development Department will provide up to $10,000 in micro loans to qualifying entrepreneurs, microenterprise startups, and small business owners within the Salem City limits. The Micro Business Loan Program targets businesses owned by low- and moderate-income individuals, women-owned business, and businesses owned by minorities. Businesses located within the City's designated Neighborhood Revitalization Strategy Area (NRSA) will be given priority in this loan program. The borrower and the business must meet the minimum requirement as outlined below. Additional requirements apply. Eligible businesses are agriculture, construction, retail, manufacturing, and dining. ELIGIBILITY Eligible business must be located within the Salem City limits. Applicants may be start-ups or existing business. Eligible projects must demonstrate a need for the City of Salem Micro Business Loan financing. Generally such need arises from the inability to secure adequate financing from conventional lenders due to insufficient loan to value, insufficient cash flow, low-income status, and/or start-up nature of business project. Eligible Borrower 1. Must have income at or below 80% of the area median family income. 2. loan applicants must be current clients or graduates of an approved micro enterprise or business training program. Graduates must have completed a business training course no longer than 36 months from the date of submitting an application. 3. Must be the business owner and have 30% collateral as applicable in the business. 4. Start-ups and existing businesses must provide an approved business plan from a business training or microenterprise training program. S. Current personal financial statements ofthe business owner. Eligible Business 1. Located within the Salem City limits. 2. Business with five or fewer employees, one or more of who is the business owner. 3. Businesses within the designated Neighborhood Revitalization Strategy Area (NRSA) will be given priority. G: \ URBAN DEV\AD MIN ISTRATI ON\Fina I Cou nci I Staff Reports\2010\MA R 22\M icroloa n \M icroloa n PolicylOfeb lo.d ac Rev. 3/10

6 4. Have at least three (3) years complete financial statements of the business. Microenterprise start-ups do not have to meet this requirement. Eligible Use of Funds Except for the purchase of land, major rehabilitation of structures, demolition of structures, and new constructions, all bona fide costs associated with the business are eligible for funding. Eligible uses of the Micro Business Loan funds include; 1. Start-up costs 2. Working capital 3. Equipment purchase 4. Machinery PROGRAM TERMS The terms of the Micro Business Loan Program are intended to provide additional flexibility over conventional lending programs to accommodate and adapt to the changing needs of local businesses. This flexibility in not intended to replace market lending, but to assist disadvantaged businesses in securing gap financing to sustain their enterprises. 1. Loan Amount The loan amount is determined by availability of funds and the job creation impact of the project funded. Loan amount per business will range from $2,000 to a maximum of $10,000. Applications for loans outside the range will be reviewed on case by case basis. 2. Collateral Security will be required, as necessary, to adequately collateralize the loan. Security will usually consist of liens against real property and/or business personal property, personal guarantees of all principals who hold more than 20% ownership interest, and may include personal assets of the business owner. 3. Loan Term Loan repayment terms are based on individual projects needs. Terms are between three (3) and five (5) years. There will be no penalties for early repayment ofthe loan. G: \ U R BA N D EV\AD MIN ISTRATION\Final Cau nci I Staff Re ports\2010\mar 22\M icroloa n \M icroloa n PolicylOfeb 10. doc Rev. 3/10

7 4. Interest Rates Amortized loans will have a 5% fixed interest rate at the time of closing and will remain fixed for the term of the loan. 5. Fees Applicants will be charged a$65 non-refundable application fee at the time of the application and a $25 credit report fee. PROJECT PREFERENCE CRITERIA Projects selected for funding must meet the goals and objectives of the CDBG Program as mentioned above under Program Description. Additionally, the following project preference criteria will be used to evaluate projects: 1. Matching Funds - Ratio of private and public funds invested in the project 2. Risk - Demonstration of market feasibility and loan repayment ability. 3. Timeliness - Ability to move forward with the project in a timely manner. LOAN REVIEW COMMITTEE The Loan Review Committee (LRC) reviews all loan proposals prior to final approval. The six member advisory committee will serve to ensure that all loans meet the public purpose. The LRC will be comprised of two bankers, two representatives of microenterprise training programs, one stakeholder from the business community, and one Urban Development Department staff person. If members from the Committee have a personal or institutional financial interest in the proposed project, they will be required to declare a conflict of interest and abstain from participating in the project funding discussion. APPLICATION PROCESS The processing time for a complete application is three (3) to five (5) weeks. The following is a summary of the steps during the review process; 1. Eligible applicants meet with the approved microenterprise training program staff to discuss requirements, credit criteria, and other application requirements (including review of applications and other required documents necessary for credit analysis). 2. Applicant(s) submit formal application (including a business plan and other information regarding project and/or business), a $65 non-refundable application fee and a $25 nonrefundable credit report fee. 3. City Staff review application. 4. Applications are passed along for detailed evaluation, credit analysis, and risk assessments. Recommendations are made to the lrc. 5. Recommendations of the lrc are forwarded to the director of the Urban Development Department (or designated representative) for final approval or denial. 6. Notification is sent to applicants in the form of an offer or denial of the Micro Business loan. G: \ URBAN D EV\ADM I N ISTRATIO N\Fina I Cou nci I Staff Reports\2010\MAR 22\Micro loa n \M icro Loa n PolicylOfeb lo.doc Rev.3jlO

8 OTHER FEDERAL OR STATE REQUIREMENTS The Micro Business Loan Programs is funded through the Community Development Block Grant issued by the U.S Department of Housing and Urban Development (HUD). Loan recipients are bound to the following requirements, Environmental Review: All loan requests are subject to federally required environmental and historic reviews by the City of Salem. These may vary in scope, depending on the use of loan proceeds. Equal Opportunity: Projects funded by the loan programs are subject to the provisions of the Americans with Disabilities Act. Loan recipients must give equal consideration to all qualified job applicants without regard to race, color, religion, sex, or national origin. Flood Plain Insurance: Loan recipients located in a floodplain must obtain adequate flood insurance coverage. QUESTIONS Please contact Rena Peck, City of Salem Urban Development Department at (503) Ext 7546 G:\URBANDEV\ADMINISTRATION\Final Council Staff Reports\2010\MAR 22\Mkroloan\MicroLoanPolicylOfeblO.doc ~ev.3/10