When the SBA's Washington, DC, regional office set out to increase funding to homebased firms around the nation's capital, it took a uniquely aggressive approach: It created a loan program last August specifically for homebased entrepreneurs, one of the most underserved segments of the business credit industry. But there was just one hitch: It couldn't find a single local lender that was willing to make a loan as little as $5,000.
While Washington, DC, lenders were shunning the types of small loans homebased businesses needed, Innovative Bank, an Oakland, California, lender, was busy funding modest credit requests in major western cities, including San Francisco. Joseph Loddo, director of the SBA's Washington, DC, district, recruited Innovative Bank for his Small Office/Home Office (SOHO) lending initiative, which provides guaranteed loans of $5,000 to $25,000 to homebased firms and "small office" companies operating outside the home without employees.
"The applicant is able to get [a loan] within seven days to help them start a business or help them with an existing business," says Loddo. "[Before], when a person who owned a homebased business applied for a loan, they ended up getting a consumer loan, a personal line of credit or a high-interest credit card. We're correcting a mismatch in terms of the sources and uses of funds: a business loan for a business purpose."
Brigitta Toruno was an early recipient. Toruno, owner of UNO Communications, a homebased translation service in Sterling, Virginia, needed financing for a website and marketing. "The program seemed to be a good fit because I wasn't looking for a large loan, and a lot of SBA loans are at least $50,000 to $100,000," says Toruno, 39. While small by industry standards, the $5,000 loan she secured last September provided adequate support. "We work with translators for over 20 languages," she says, "and it's going to help me expand the language base [even further]."
Loddo's exhaustive search to find a lender for his program underscores the difficulty homebased firms have securing credit. Banks argue that homebased firms are difficult to lend to because they lack business assets and that loans to them are costly. A lender may invest as much time lending $25,000 as $250,000, "but you can't get 10 times as much in rate and fee income," explains Lyle Frederickson, senior vice president of Arizona Business Bank in Phoenix.
Even after the start-up stage, getting financing doesn't necessarily get any easier. Chris Millard, 40, who owns a homebased business in Gilbert, Arizona, with his wife, Linda, received a $100,000 SBA loan, but it wasn't easy. "The SBA process on the bank side is difficult, and they don't like to mess with someone only wanting a $100,000 line of credit to start a business," he says. "When you're getting a $100,000 [loan], you'd think they'd be more interested in loaning you $20,000, when, in reality, that isn't true."
The Millards' firm, DIALYassist, which provides nurses to health-care facilities, had a two-year track record and positive cash flow. Linda, 39, a registered nurse, used the loan to expand the business by providing dialysis services to six area hospitals. Even with revenue from hospital contracts, a profitable history and relationships with medical facilities, the credit line required an SBA guarantee.