New lender would target mid-market borrowers

A new type of lending institution is in the works to provide loans guaranteed by the Small Business Administration to Nevada businesses that need $35,000 to $250,000.

The institution is an initiative of Nevada State Development Corp., a nonprofit lender with offices in Reno and Las Vegas that specializes in SBA loans. They work with executives of the federal agency.

But the new organization might be a for-profit venture, said Debra Alexandre, president of Nevada State Development Corp. A for-profit structure might be more attractive to the investors who would put up the $5 million in capital to get it off the ground.

David Leonard, senior area manager in the SBA's office in Reno, said loans for businesses that need $35,000 or less are available through micro-lenders such as the Nevada Microenterprise Initiative. And commercial banks, he said, continue to take on borrowers who need SBA-guaranteed loans of $250,000 or more.

But options for SBA-guaranteed loans are few for borrowers who need $35,000 to $250,000.

"We saw this as an issue that really needs to be addressed," Leonard said.

Nineteen states have similar lending institutions. They're known as "BIDCOs" which is short for "Business and Industrial Development Company."

The institutions arrange to sell the SBA-guaranteed loans that they've made into a secondary market. They then reinvest the proceeds from the sale of loans into additional lending.

They don't collect deposits or provide other banking services.

The BIDCO planned in Nevada would make loans for working capital, equipment and machinery purchases and real estate.

Those loans, which SBA calls its "7a" program, historically have been made by commercial banks in Nevada, and the federal agency guarantees repayment of a portion of the loan.

But Leonard notes that SBA-guaranteed loans through the 7a program fell sharply with the credit crunch.

In the most recent federal fiscal year, 289 loans were made through the SBA program in Nevada a figure that is below the levels of 10 years ago. The program reached its peak in Nevada in 2007, when 1,019 loans were made through the 7a program.

Nevada State Development Corp. makes loans through a different SBA program that is limited to fixed assets such as real estate and equipment.

Still, Leonard said the experience of Nevada State Development Corp. with SBA lending, as well as its ability to manage lending throughout economic cycles, provide a good foundation for the proposed new institution.

"This is a great thing they are doing for the state," he said.

Alexandre said the development corporation's board has given its approval to the creation of a Business and Industrial Development Co., but regulatory and financial details have yet to be ironed out.

The new institution would be legally separate from Nevada State Development Corp., but probably would contract with it for loan processing and other services.

The Nevada Financial Institutions Division would have regulatory oversight of the proposed new institution. The state would be responsible for regular financial examinations and would require annual reports from the institution.

A spokeswoman for the Financial Institutions Division said last week it's been at least a decade since the division issued a license to a development corporation. Review of an application by the division likely would take four to five months.

Alexandre said backers have budgeted $5 million in capital for the new institution, although it might be able to take flight with as little as $3 million in capital.

Banks are possible sources of capital, she said, especially because the new lender wouldn't be directly competitive with them.

But private investors, whether they're banks or others, are likely to want financial return on the capital they put up, Alexandre said, and that may encourage creation of a for-profit company rather than a non-profit lender.

Demand for loans through the Nevada BIDCO, she said, likely would fluctuate with the demand from small business borrowers as well as the appetite from lenders for the risks associated with small-business borrowers.

Alexandre said the new institution is likely to be in operation sometime in 2011.

"We think it's doable to at least get started in the next calendar year," she said.