Community Economic Development Fund Makes A Difference For Small Businesses

This recession has been particularly hard on Connecticut’s small businesses. Working capital is the lifeblood of small enterprises, and the credit crunch shut down many routine sources of funding for companies, in many cases leaving them high and dry. WNPR’s Harriet Jones reports on one non-profit agency that aims to get loan capital where it’s needed most, into the hands of Connecticut’s small entrepreneurs.

Jane and Colin Kagel are setting the table for incoming guests at their East Haddam bed and breakfast, the Bishopsgate Inn.

The Kagels bought this business in 1995, turned a profit three years later, and never had a problem dealing with the banks, who at that stage were keen to lend. But Colin Kagel says all that changed in 2008, when he tried to refinance their debt.

"Although we had a very good and very profitable story to tell, the entire banking industry had stepped over the cliff on this nosedive that we’re in today, and basically were not interested in dealing with anyone in this kind of business."

Before he went into the hospitality industry to build a family business, Kagel worked for many years for Wells Fargo. He says he had experience in how to present a loan application.

"I went in that period of time to over 46 lending institutions, with a package that was probably two and a half inches thick, including everything from business plan, to the soup to nuts."

But still the answer was no – the Kagels and the Bishopsgate Inn had become, in the parlance of the industry, unbankable. In desperation, he wrote to Senator Chris Dodd and to state officials, telling them he faced going out of business, because his lines of credit were being shut down, and interest rates on credit card debt were skyrocketing. He got a call back, advising him to apply to CEDF, the Community Economic Development Fund.

"And to this day, I hear that in my ear, and say – wow, can you get your life turned around in one instant – and that was it."

CEDF, the Community Economic Development Fund, is a non-profit agency that’s funded by investments and grants from around 20 banks, along with state and federal dollars. It lends to small enterprises that don’t fit into the normal banking world. President and CEO Donna Wertenbach says in the last two years, CEDF has seen many businesses who previously could have dealt with the banks, like the East Haddam B&B, come knocking on its doors.

"If they had assets – real estate – the value of their assets have dropped. And that means that if they have traditionally looked to banks to be their source of capital, banks require collateral, and so the value of their collateral has dropped and now they no longer have available collateral to access new capital."

And she says the financial landscape has changed in other ways. For instance, pre-recession, credit card debt was a common way that many small entrepreneurs got their business off the ground.

"And at 8% while it might not have always been their best choice, it wasn’t necessarily a horrible choice. All of a sudden they found themselves carrying balances sometimes as high $100,000, and watching their next monthly bill come in, and their interest rate went from 8% to 30%, and now it’s a horrible alternative to be using credit cards to carry any of the cash flow needs of a business."

CEDF has a different lending process than a traditional bank. It does not offer standardized loans, instead it customizes the loan for the business, taking as a starting point the monthly payment the company can afford, and then structuring the loan to fit. It also provides a small business counselor who will work with the loan recipient to ensure they can deal with any challenges that come their way. Colin Kagel at the Bishopsgate Inn says it’s process that’s worked for him.

"CEDF is a lot more than the generator of a loan for us. Being able to pick up the phone and talk to somebody at CEDF and bounce ideas off somebody who has a real understanding of what it’s like to run a business like this, people who have been here, seen the place, seen what we do – that’s a resource that CEDF has that I don’t see in a bank."

And CEDF’s default rates tell the same story. In 2009, the federal Small Business Administration had a slightly less than 13% charge-off rate, representing businesses that failed to pay back loans. CEDF’s charge-off rate in that same period was 6% on about $4 million in loans. But Donna Wertenbach says many businesses in the state still don’t realize there is an alternative to traditional financing until it’s too late.

"Every one of those businesses that we lose in Connecticut hurts us all – it hurts our economy, it hurts our job market. And it is critical that we all work together as a team and support every single business we possibly can to get them through this, so that they become our new economy when we get out the other end."

For WNPR, I'm Harriet Jones.