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Cascade: No. 80, Spring/Summer 2012

CDFI Adapts to Small Business Credit Challenges*

The Cooperative Business Assistance Corporation (CBAC), a Camden, NJ-based nonprofit business lender marking its 25th anniversary, sees first-hand the adverse effects of the recession on the small business sector in southern New Jersey and Philadelphia.

Harry W. Stone, a certified public accountant who became CBAC’s executive director after serving as its director of lending since 1999, said in May that “many small businesses in our community, particularly closely held ‘mom-and-pop’ businesses,1 continue to struggle and are experiencing ongoing challenges to their economic stability.” He said that small businesses in South Jersey, especially those in the retail, service, and manufacturing industries, are facing lower revenue and profits and a slower recovery than many larger businesses. As a result, many businesses must take significant steps to maintain their viability, often including a reduction in the number of their employees.2

Stone observed that “the owners are doing the right things in terms of operating and marketing their businesses, but the demand for their products and services is no longer there the way it was before the latest recession.” CBAC’s loan demand has grown largely due to increased demand for working capital financing to support borrowers’ cash flow needs.

The challenging economy has made it necessary for CBAC to be more prudent in its credit underwriting process and to obtain additional guarantors and collateral when possible, Stone explained. CBAC has experienced a rise in loan delinquencies and has increased its technical assistance and site visits with borrowers.

CBAC, which became a community development financial institution (CDFI) in 2003, uses credit history but not credit scores and relies on referral relationships with banks, chambers of commerce, and nonprofits for marketing exposure and new loan application generation.

CBAC partners with a dozen banks in funding loan requests from small businesses in Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Philadelphia, and Salem counties.3 Typically, a participating bank finances 75 percent of a deal, while CBAC funds the remaining amount. CBAC draws on a dozen sources for its portion, including the New Jersey Economic Development Authority, USDA Rural Development, and county programs. The loans are made to service, retail, and manufacturing businesses for owner-occupied commercial real estate, equipment, or working capital.

“CBAC’s loan is always subordinate to the bank loan, reducing the bank’s risk exposure, often allowing for more flexibility on rate and terms, and giving the borrower a more attractive overall loan package,” Stone said.

CBAC is also active in using the U.S. Small Business Administration’s (SBA) microloan program in its seven-county southern New Jersey region and in Philadelphia. CBAC borrows loan capital from the SBA and makes loans up to $50,000 for up to six years to retail, service, and manufacturing businesses. A typical borrower uses the loan for multiple purposes: working capital, equipment, and inventory. Borrowers can be start-ups or existing businesses.

CBAC closed 134 loans totaling just over $5 million in the fiscal year ended June 30, 2011, a record year in both its number of loans and dollar amount. In the prior fiscal year ended June 30, 2010, CBAC closed 76 loans totaling slightly more than $2.7 million. CBAC has about 370 outstanding loans totaling almost $14 million.

CBAC is the largest New Jersey lender, and one of the nation’s largest lenders, in the SBA microloan program. CBAC made 79 SBA microloans totaling $1.5 million, with the average loan being about $16,000 in the year ended September 30, 2011.4

CBAC began making SBA microloans in Philadelphia in 2009 in response to requests from the SBA and Philadelphia banks. It has closed 22 such loans totaling almost $500,000. The majority of the loans were in the retail and service sectors, with the average loan just above $21,000.

CBAC manages 23 different federal, county, and city small business loan programs. Each CBAC loan program has a defined geographic area for business eligibility and often has different underwriting and eligibility criteria.

CBAC has nine employees, including six former bankers.

For information, contact Harry Stone at 856-966-8181 or hstone@cbaclenders.com E-Mail; http://www.cbaclenders.com/home.html External Link.

  • * The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • 1 Stone defines ”mom-and-pop” businesses as closely held businesses with annual revenues of up to $250,000 and fewer than 10 employees.
  • 2New Jersey’s seasonally adjusted unemployment rate was 9.1 percent in April 2012, above the national average and the highest among the states of Pennsylvania, New Jersey, and Delaware.
  • 3 The banks include Bank of America; Citizens Bank; Colonial Bank, FSB; Columbia Bank; Fulton Bank of New Jersey; PNC Bank; Republic Bank; Sun National Bank; Susquehanna Bank; TD Bank, N.A.; and Wells Fargo.
  • 4 The SBA’s reporting period for microloans at the time was October 1 to September 30.