By Jamison Cocklin
When the Federal Reserve first sought to battle the recession in 2008 and ease the credit crunch by keeping interest rates at or near zero, businesses and homeowners thought the financing they needed to stave off hardship might be easier to get.
Instead, they hit a wall.
A liquidity crisis ensued, and banks found their balance sheets riddled with troubled loans. Unable to sell them, little money was available to make new loans.
For many in the Mahoning Valley and the nation, however, nonbank lenders were waiting in the wings.
Lenders known as Commercial Development Financial Institutions have cash to lend, require less collateral than traditional banks and have far less restrictive lending standards.
CDFIs make loans at below-market rates, though the interest on these loans varies. Rates are usually offered around 3 percent, depending on the term and size of the loan.
For many years, CDFIs have served as an invisible backbone for Ohio’s ailing small businesses and faltering homeowners. Most often, they make loans when traditional banks won’t.
“Our industry is not big enough to change the country as a whole,” said David Kahley, president and CEO of the Progress Fund, a CDFI in Greensburg, Pa. “We make loans that will create jobs; we make loans for communities.”
Many of the fund managers The Vindicator spoke with said they are “under-loaned,” explaining not enough entrepreneurs know they exist.
“One of the frustrating things for us is we are not fully loaned out,” said Bill McIntyre, program coordinator at The Common Wealth Revolving Loan Fund in Kent.
“We’ve made about $6 million in loans, but I could make $12 million in loans if more borrowers were knocking on our doors,” Kahley added.
NOT EVERYONE WINS
He said CDFIs “will not lend to just anyone,” but instead they search for individuals or companies looking to launch strong business plans and create jobs.
Meanwhile traditional banks have eased their lending standards in recent years. Both Kahley and McIntyre said that as a result of lower interest rates, they now face stiffer competition from the banking industry.
Last April, the Federal Reserve reported domestic banks eased their standards on commercial loans in response to more aggressive competition from other banks and nonbank lenders, like CDFIs and nonprofit development organizations.
Still, the lending spigots have not entirely opened.
Just ask Clyde McClellan, owner of American Mug and Stein in East Liverpool who recently earned national attention after his company landed a major deal with Starbucks Coffee Co. to manufacture mugs for its “Indivisible” product line.
Without the Progress Fund, McClellan said he would have been unable to fill any orders or create 13 jobs in a city that desperately needs them.
When he approached his longtime bank, PNC, with what Kahley called an “iron-clad” contract from Starbucks, bank officials twice rejected his loan request.
“We were in desperate need of money,” McClellan said. “PNC was looking strictly at our numbers, which were disastrous, but I had the purchase orders from Starbucks in my hands. The local people at that bank knew us, and they knew we weren’t a fly-by-night operation, but when it gets two or three levels above them, you’re just a number.
“People don’t realize how close we came to the precipice during the financial meltdown,” McClellan added.
McClellan said his fortunes since have shifted, his company is turning a strong profit, and he plans to create more jobs with a new factory in New Waterford.
BANK STAYS MUM
When asked to discuss its lending standards in comparison to CDFIs, PNC spokeswoman Amy Vargo said the bank cannot discuss individual customers.
“For competitive reasons, we don’t get into the rules on lending,” she said. “It’s all based on mathematical formulas, and we just don’t get into specifics.”
She did say, however, that “PNC is actively lending to businesses of all sizes.” During the first quarter of 2012, loans and commitments at PNC totaled $35 billion, including $1.1 billion of small business loans.
Pete Asimakopoulos, executive vice president for small business banking at First National Bank in Youngstown, said his bank consistently looks for qualified borrowers who are producing profits, have sufficient cash flow to service their debt and adequate collateral to back a loan.
“Maintaining an outstanding credit culture is good business, but it does not exclude an aggressive lending culture,” he said. “We consistently provide capital to local businesses,” which he said was evidenced by 12 consecutive quarters of growth in First National’s commercial-loan portfolios.
2,400 JOBS CREATED
In all, the Progress Fund has helped to create 2,400 jobs in Ohio and Pennsylvania, Kahley said.
During the recession, Kahley and McIntyre said that the more than 900 CDFIs nationwide provided a vital service to ailing businesses.
Unlike banks that experienced degrees of financial stability, most CDFIs managed to keep their assets increasing. Their self-sufficiency rates were balanced by both support from the federal government and earned revenue. Interest on loans and other investments accounted for about 47 percent of their total portfolios.
What’s more, many have experienced low delinquency rates. The U.S. Treasury Department reported that, between 2007 and 2009, delinquencies accounted for only 3.5 percent of CDFI portfolios. During the same time, these lenders originated $10.9 billion in loans and investments, according to the Treasury Department.
Many of Ohio’s CDFIs are clustered around hub cities, such as Dayton, Columbus and Cleveland. But the Youngstown area still receives funding from them.
For instance, the Revolving Loan Fund in Kent recently made a $57, 257 loan to Common Wealth Inc., a local nonprofit developer, to construct a building on Baldwin Street on Youngstown’s North Side. Serving four tenants, that property is now leased. Common Wealth will look to sell the building when it can.
Kahley and McIntyre believe traditional banks still serve a crucial role in the economy. They say many banks would like to lend more but cannot because of the systemic fallout that occurred after the recession.
They added the burdensome regulations banks face often restrict them from lending in ways similar to CDFIs.
Kahley maintains, however, that pointed efforts must be made to further open the credit markets, in order to better spur economic growth in Ohio and elsewhere.
“What allows a lot of people to swtay in business is cash; they need that cash flow” he said. “They just need a little help, and that’s what we do. With banks its ‘pay us or we’ll put you under.’ It’s not just the banks, it’s the entire system. It needs to be rethought.”