For more than a decade after launching a fine-art print business in their home in 1992, entrepreneurs Ken and Laurie Green relied on "seat-of-our-pants financing."
With their own funds and loans from family members, Ken and Laurie still managed to piece together enough financing to move their Pittsfield, Massachusetts-based company, Museum Facsimiles, out of their home. Along the way, they even built it into an award-winning stationery business and manufacturer of custom frames and mirrors for high-end retailers like Neiman Marcus.
Despite Ken and Laurie's marketing success, however, commercial financing still proved elusive. "[There were] little bits here and there, but nothing significant," says Laurie. But the company's fortunes changed in 2005, when the couple learned of Massachusetts' Capital Access Program, or CAP.
First introduced in Michigan in 1986, CAPs are now operated in 24 states and 20 municipalities. The program works by creating a special loan-loss reserve account financed by a borrower's fee and matching funds from the program, and it enables participating banks to offer loans that carry a higher level of risk than allowed by conventional lending standards. Borrowers can use the loans for equipment purchases, accounts receivable, inventory and working capital lines of credit.
The CAP loan process works like this: The bank and borrower each pay an upfront insurance premium that, when combined, is generally 3 percent to 7 percent of the loan amount. Contributions to the loss-reserve account are then matched by the state. The loan-loss reserve, which can be tapped to cover losses on CAP financing, encourages lenders to extend credit to businesses that wouldn't qualify under standard loan policies. Most kinds of commercial loans qualify for CAP financing, which in some states has a credit limit in excess of $2 million.
The lender sets all the terms and conditions and decides which loans are enrolled in the program. "It's easy to use," says Morrie Wiseman, senior vice president of DeMotte State Bank, one of 17 banks participating in the CAP financing program administered by the Indiana Economic Development Corp. "There is really not a formal application process, per se."
While CAP loans are more expensive than traditional loans, they're likely to be much less costly for companies than nonbank sources of financing--if those are even an option for the borrower. "It buys the customer time to get their [business] in order and then seek more conventional financing," says Ken and Laurie's lender, Hank Ervin, vice president of commercial lending at Pittsfield Cooperative Bank. "It really does have tremendous flexibility."
A $25,000 CAP loan gave the Greens the financial breathing room they needed to capitalize on marketing opportunities and successfully build their customer base. Indeed, the $1 million company used proceeds from the loan to attend the New York International Gift Fair. At the fair, Ken and Laurie struck a deal with a Syracuse, New York-based moulding company, which helped solidify a project they'd started in 2001 with the Statue of Liberty-Ellis Island Foundation to custom-frame copies of ship passenger records from Ellis Island. "It was another launching pad for us," says Laurie, who adds that Museum Facsimiles is now working on a project with the Public Broadcasting Service and is also producing products for a chain of stores in Moscow. "[The CAP loan] allowed us to move forward rather than just fix something."
Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.
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