Accessing Capital

Capital is necessary to run any business, but accessing capital and working through issues that accompany loan application can be a difficult process for small and minority businesses.

A loan is the customary means by which a company obtains an infusion of working capital. There are many different loan options available to companies, and it is up to each company's owner to decide which options to pursue. Many choose the route of a commercial loan from a bank or other financial institution while others pursue loans available through special programs such as the Minority Business Enterprise Loan Program. Regardless of the option chosen, the decision-making process will be similar, and it is imperative that the company is presented in such a manner so as to make approval more likely.
 
There are several factors to be considered when looking at various loan options. First, what is the amount of money needed and the anticipated usage of the money? For example, is the money to be used as working capital or for the purchase of equipment? Other factors to consider include repayment terms and accompanying conditions of the loan. Is the loan a maturity instrument, an amortized loan or a term loan? Last, but certainly not least, what type of collateral is required?

After considering these factors and making a determination as to the type of loan to pursue, all company paperwork and finances must be order. Typically, records should include an overview that details products and services, organizational structure and important information such as length of time in business. Perhaps most important are the company's financial statements. Financial statements should paint a complete picture of the company’s finances and allow the lending institution to adequately assess credit worthiness. There are several different types of financial statements; however, those prepared by a CPA firm are most credible.

The lender's review process will focus on several key areas and will encompass many of the same factors the borrower considers when determining the type of loan to pursue. First and foremost, what is the purpose of the loan? Is it legal, ethical and compliant with all applicable policies? Can the applicant repay the loan? To determine this, the lender analyzes cash flow, collateral and guarantees. Finally, the lender looks at how this loan will be structured?

While some programs are easier and less timely to navigate than others, all involve some element of the aforementioned factors. State and federal government loan programs are designed to help ease this process for small and minority business owners, but whether a company can take advantage of one of these programs depends largely upon the company itself.

Mississippi has several loan programs available to small and minority businesses that have been certified by the Minority and Small Business Development Division of the Mississippi Development Authority (MDA). Below is a list of the State programs and a brief description of each.

The Minority Business Micro Loan Program, administered by MDA, provides a funding source for businesses in need of financing for small projects. Loan amounts for projects range from $2,000 to $35,000, and owner's equity injection (i.e. cash, tangible equity such as land, building or equipment) is as low as five percent. Loan proceeds are not intended for use as gap financing and cannot be used along with any other financing. These funds may be used for purchasing fixed assets such as equipment, working capital, or inventory purchase.

Borrowers must be creditworthy, demonstrate an ability to repay the loan and must not be in default of any previous loan from the state or federal government.
Minority businesses not eligible to participate in the program include charitable institutions, nonprofit enterprises, enterprises through which editorial opinions are expressed or businesses engaged in lending.

The Minority Business Enterprise Loan Program combines state and private lending sources to assist new and existing minority businesses in gaining access to needed capital in the form of direct low-interest loans.

The borrower must have at least five percent equity in the business (i.e., cash or tangible assets such as land, building or equipment), be credit worthy, demonstrate the ability to repay the loan and must not be in default of any previous loans from the state or federal government.

The maximum MDA loan amount to any one borrower is $250,000 or 50 percent of the total project cost, whichever is less. Maximum terms are seven years for working capital, ten years for machinery and equipment and fifteen years for land and buildings.

The maximum interest rate charged on the MDA portion of the loan is two percent above the Federal Reserve discount rate, and the minimum is two percent below the discount rate.

This program is administered by MDA through the Mississippi Planning and Development Districts (PDDs).

The Mississippi Capital Access Program (MS CAP), also administered by MDA, is designed to increase the availability of financing for borrowers who, for various reasons, might have difficulty in obtaining conventional loans. Under the capital access program, a participating financial institution may make a loan to any borrower which MDA determines to be qualified under the rules and regulations adopted by the authority. MDA establishes loss reserve accounts at financial institutions that participate in the program and requires payments by the financial institution and the borrower to these reserve accounts to protect the lender in the event of a loan default. Should the borrower default on the loan, the lender is partially covered from loss by reimbursement from the loss reserve account.

The terms are set by the financial institution, and the maximum loan amount is $150,000 per borrower. Payments made by the borrower into the loss reserve account will have a maximum payment of seven percent. The minimum interest rate is 1.5 percent.

The Capital Access Contract Loan Program assists socially and economically disadvantaged businesses as designated by the U. S. Small Business Act by providing loans to borrowers with contracts with public entities who, for various reasons, might have difficulty in obtaining conventional loans.

Loan proceeds may be used for costs associated with a public construction project or a public construction related project, with the contract being used as collateral for each loan.

Loans made under the Capital Access Contract Loan Program may be made for the length of the secured contract in amounts not to exceed $75,000 or 75 percent of the contract. The annual interest rate on these loans is zero percent. This loan program has a limit of three loans per borrower.

In 2009 alone, the State loan programs have resulted in 19 approved loans for a total of $1,484,597. To find out more about how your small or minority-owned business can benefit from these loan programs, contact the Minority and Small Business Development Division of the Mississippi Development Authority at 601.359.3448 or visit http://www.mississippi.org and select the minority business link near the top of the page.

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