cdc small business finance

cdc small business finance

The Role of the CDC in Small Business Finance

1. Introduction to Small Business Finance

However, small businesses face difficulties in obtaining funding. Sources of small business funding may be separated into two categories: “equity” funding, which involves ownership interests, and “debt” funding, which implies a credit relationship. The first, equity funding, is the funds provided by the owner(s) of a small business. Many of them are private savings. It is the external sources of finance, however, that are most significant. Debt funding comes from personal savings, friends and relatives, informal investors, net worth from other businesses, long-term permanent debt (traditional lenders), long-term debt (SBA backed loans), short-term permanent debt (traditional lenders), and short-term debt (SBA backed loans).

Small businesses are often viewed as the engine for economic growth. They provide a significant amount of jobs and are often more labor-intensive than larger enterprises. They are seen as promoting efficiency by encouraging innovation and mobilizing savings for productive investment. This is particularly true in more developed economies. Small business owners often possess extensive knowledge of the markets and customers that they target and are more aggressive in the pursuit of business goals.

2. Understanding the CDC and its Mission

The CDC has provided over $1 billion in long-term financing to emerging and transitional small and medium-sized companies since 1958. These companies generate job growth and wealth for our communities. In the last ten years, the fund has invested over $150 million in 150 small businesses. Each project invested in must be part of a strategic job creation plan specific to and consistent with Georgia’s job strategy. These investments help build healthy economies by fostering local entrepreneurship and creating high-quality, educated jobs. Support for these investments is essential to avoid business failures that deteriorate economic conditions and reduce job opportunities.

The CDC was founded in 1958 and has played a crucial role in community and economic development since that time. The CDC is a private, nonprofit corporation operating as an investment company licensed by the Small Business Administration. The CDC certifies companies as Small Business Investment Companies (SBICs), enabling them to issue debentures guaranteed by the SBA through the Section 303 program to help finance small to medium-sized enterprises. The CDC’s mission is to play a significant role in generating economic growth and implementing Georgia’s job strategy by providing investment capital and loans to increase the flow of funds to Georgia’s small and underserved businesses that complement Georgia’s job strategy.

3. CDC Financing Programs for Small Businesses

The 508 program finances long-term asset building for the small business issuers and similar ventures, and through the SBA, will finance new projects for businesses that have never been in a relationship with it and have not established an ongoing record of profitability.

For the most part, 504 will not finance short-term needs such as working capital, inventory, or accounts receivable. It will not serve automobile or boat sales outlets or food service facilities, including gas bars that primarily provide meals. And not all buildings that are in the way. The only things which 504 will finance about higher structures at the time of construction are what.

504 funds the purchase of long-term fixed assets such as equipment or buildings. For example, a manufacturing firm could use a 504 loan to buy a distant piece of equipment. This money would remain in this community and be used over and over, providing benefits to many businesses in the area.

There are two long-term financing programs available for expanding small businesses through the CDCs, financed by the SBA and the capital markets. The two programs are called 504 and 508.

4. Success Stories of Small Businesses Supported by CDCs

Success Stories of Small Businesses Supported by CDCs An independent study was done in Maryland to analyze the effect of 504 loans supported by the Eastern Federal Corp. The study used data from the Maryland Department of Assessments and Taxation and the Maryland Economic Growth, Resource-Based Restrictions and Chesapeake Bay Research. These data comprised 393 firms selected from the Florida database that offered both 504 and “conventional business” loans, defined as loans from community, state, or regional commercial banks, locally owned community banks and credit unions. The results showed that 504 borrowers had significantly higher growth rates for both employment and sales. The results further indicated that, while growth for 504 and conventional borrowers was similar before receipt of the loan, 504 borrowers had significantly greater growth in employment and sales for two or more years after the loan was received.

Small Business Lending The U.S. Small Business Administration (SBA) and non-profits help businesses with training programs, support for women and minorities, loans and job creation. Through the 504 Certified Development Company loan program, non-profit CDCs and local development companies help small businesses through loans for fixed assets at low fixed interest rates fully amortized over a term of up to 20 years. The 504 program is relatively flexible in its terms and conditions, allowing problems to be resolved on an as-determined basis. The U.S. Small Business Administration has significant oversight of the program with systems in place to ensure continued government involvement in approving 504 lending applications and ensuring performance and compliance.

Location and Economic Development The success of supporting some small businesses and not others has caused a swell of judgments about what makes a small business successful. Those involved in supporting small businesses have argued for years over what characteristics will help businesses become bankable or likely to succeed and stimulate growth in the community. Since we cannot know exactly what these factors are, it is best to help all businesses that can absorb the risk of financing their ventures, since even taking a marginal client with marginal applications might be the support that gives him or her the opportunity to succeed. The support of community economic development is also important to ensure that business operates in areas with a clear need for development.

Introduction Advances in small business development have expanded the mission of community development corporations (CDCs) over the past four decades. They have moved beyond housing to employee training and child development programs that sustain jobs and help families improve their economic prospects. CDCs also have taken on various economic development projects, including small business lending. The mid-1990s were pivotal years for small business lending by CDCs in that it became an eligibility criterion for technical assistance from the U.S. Department of Health and Human Services and has become a priority for increasing amounts of funding from the U.S. Department of Housing and Urban Development. In addition, many state governments and the SBA have awarded grants and project funds that disproportionately supported business lending capability. This paper presents a history and profile of the small business strategy using data from the national trade group and a survey of some of the most active selling partners, which are typically chambers of commerce, administrative organizations or other CDCs.

5. The Future of CDCs in Small Business Finance

The most logical steps would be first to buy par shares; second, to change the standards for the “public purpose” of local companies and property used as collateral for a loan; and, finally, to make CDC investment training available to commercial banks and savings banks. There are potentially significant benefits that could derive if the financial health of the healthy CDCs could be restored and the still-sick CDCs could be rehabilitated. The first, most obvious benefit is the valuable financial mission that observers such as the U.S. Economic Development Administration assign to CDCs—financing small businesses that are located in low-income urban and rural areas where commercial banks and savings banks have bogged down and there are no other resources. Eleven percent of the assets of all CDCs are now invested in underperforming, economically distressed small business sectors. A distinct role for CDCs is to finance businesses that are located in low-income urban and rural areas that have exhausted all their other capital resources. There is no other agent ready, willing, and able to assume this capital provision role in this particular way.

During the late 1970s and early 1980s, many CDCs enjoyed unprecedented financial growth. However, the economic conditions of the 1980s stressed the financial underpinnings of CDCs, as low-income communities and the businesses located in them were severely impacted by the “flight” of capital to the suburbs and the flight of manufacturing jobs to foreign lands. As a result, there are now only about 200 healthy CDCs that are still focusing on financing business development in distressed urban, rural, and Indian areas. This number represents merely one third of all CDCs. Of the healthy CDCs, one third are private nonprofit corporations, one third are county- and state-based economic development corporations, and the remaining third are locally based economic development corporations. It should be politically feasible to help these CDCs to play a more significant role in the financing of small businesses located in low-income urban and rural areas.