Bank of America Corp. (BAC) has announced a $10 million grant commitment to nonprofit organizations that lend to small and rural businesses.
The grants, for use as loan loss reserves, may unlock as much as $100 million in low-cost, long-term capital for small business microloans nationwide over the next 12 months.
A host of nonprofit lenders, such as Community Development Financial Institutions, or CDFIs, have been struggling to make loans throughout U.S. communities. These grants will allow the CDFIs to leverage funds from the U.S. Small Business Administration (SBA) and the U.S. Department of Agriculture (USDA), which have faced funding restraints that have limited their ability to lend.
“Helping strengthen small businesses and new start-up companies stimulates job creation and is critical to our nation’s economic recovery. Bank of America is empowering these entrepreneurs by directing private sector capital to unlock exponentially greater amounts of federal dollars for their businesses,” said Darnell. “Even the smallest grant enables a CDFI to leverage as much as ten times that amount to lend to small businesses, which helps initiate a ripple effect impacting job growth, spending and overall economic expansion.”
Mr. Darnell said the financial crisis has left small business in a tougher position than in previous downturns. “We’re seeing something unique in this cycle,” Mr. Darnell said, noting that many entrepreneurs have typically accessed home equity to fund start-ups but declines in personal wealth have limited that as an option.
SBA and USDA microloans are made through local nonprofit lenders, which also provide business training and technical assistance. To access the capital, nonprofit lenders participating in these federal loan programs must set aside loan loss reserves at levels of up to 15 percent of the capital provided by the agencies. However, due to the economic recession, most of these lenders have been unable to meet the reserve requirements, limiting their access to loan capital at a time when small businesses most need this support.
The average SBA microloan size is $13,000 per business. Through these programs, CDFIs can borrow for 10 to 20 years at rates less than two percent – twice as long and half the cost of other CDFI lending programs currently available. There are currently more than 175 nonprofit lenders participating in these programs.
Bank of America is the nation’s largest investor into CDFIs, with more than $1 billion in loans and investments to 120 CDFIs in 37 states. This work with CDFIs is part of the company’s broad support for small businesses, which includes a pledge to increase lending to small and medium-sized businesses by $5 billion in 2010. In the first half of 2010, Bank of America has provided $45.4 billion to small and medium-sized companies.
The banking giant’s grant commitment comes after Federal Reserve Chairman Ben Bernanke expressed concern earlier this month that large financial firms aren’t doing enough to help small businesses.
Other companies are also promising action. Wells Fargo & Co. (WFC) Executive Vice President Marc Bernstein’s said his bank, in addition to providing funds for community lending entities, has undertaken a new “second look” program geared toward finding credible ways to approve small business loan applications that have been rejected.
J.P. Morgan Chase & Co. (JPM) has also rolled out in-house initiatives such as offering business customers reduced interest rates for hiring workers.
Both Chase and Bank of America have second-look programs as well.
