The Capital Access Program got its start in Michigan in 1986, according to Dave Dahlin, senior finance officer with the Oregon Economic Development Department. Oregon's program was initiated in 1991, he says, and, since that time, has created or saved about 2,000 jobs. Since it began, Oregon's CAP has been the catalyst for about $53 million in loans--loans to small businesses, says Dahlin, that may never have been made without the program.
Here's how the program works: When making a CAP loan, the bank and borrower each pay an upfront fee of between 1.5 and 3 percent of the loan--for a total of 3 to 6 percent. This fee is similar to an insurance premium. The exact percentage is set at the discretion of the bank, and in practice, the bank passes its portion of the fee on to the borrower by financing it with loan proceeds.
The lending bank deposits CAP premiums into a reserve account it holds. The state then deposits matching funds into the bank's CAP reserve account. This way, the bank creates a loss reserve that's equivalent to 6 to 12 percent of total CAP loans.
When compared to overall loan-loss experiences with CAP loans, these loss-reserve percentages are compelling and indicate why the program works. For instance, according to Dahlin, with the $53 million in loans made under the CAP program in Oregon, the lenders experienced a loss rate of 6.6 percent, or about $3.5 million dollars. But because of the loan reserves of between 6 and 12 percent of the total money lended, the banks were able to fully recover their losses.
So what's the overall result of protecting lenders against losses in this fashion? More small-business loans, says Dahlin. "The program has made a large number of loans available that would not be available otherwise," he says.
Maybe so, but they come with a price. In the end, it's the borrower who foots most of the bill in the form of a higher interest rate. The following example shows how:
Assume you borrow $50,000 for five years at a 9 percent interest rate. Your monthly payment on the loan is $1,037. Assume, however, that you pay a CAP fee of 3 percent, or $1,500; the bank also pays a CAP fee of 3 percent, or another $1,500, which it then charges you. If the $3,000 in fees is taken out of the loan proceeds, then as the borrower, you don't really have $50,000 to work with. In truth, your loan proceeds are really $47,000. But because you're making monthly payments of $1,037 on $47,000 worth of usable loan principal, your effective interest rate is really 11.64 percent.
The situation doesn't change much if you borrow $53,191 to realize net proceeds of $50,000 after CAP fees. Here the effective interest rate turns out to be 11.68 percent, an increase of 29.8 percent over the initial interest rate of 9 percent.
"It's expensive when you look at it this way," says Dahlin. "Because [most] businesspeople will borrow at the lowest rate possible, these higher rates are truly for those who could not get a loan without the program."