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Loosening the purse strings

Small businesses receiving loans from Mississippi’s planning and development districts could possibly see their interest rates lowered under a bill that cleared the Senate last week. Senate Bill 2954 would delete the requirement that PDDs charge a minimum 5 percent interest rate on loans they make to small businesses in their service areas.

Instead, the interest rates could be no higher than four points above the federal discount rate, which currently sits at .75 percent.

The legislation cleared the Senate unanimously, and has headed to the House for consideration.

Lowering the rate on loans associated with the Mississippi Small Business Assistance Act was one of the recommendations included in a report the Joint Committee on Performance Evaluation and Expenditure Review (PEER) released several weeks ago. The report looked at the utilization rates and effectiveness of several of the state’s business development programs.

Findings related to the Small Business Assistance Act seem to lend credence to the notion that the minimum 5 percent interest rate clause was causing some businesses to shy away from using the program.

From fiscal year 2006 to FY 2010, the utilization percentage of the program ranged from 13.1 percent (2010) to 28.4 percent (2007).

Available funds for those years varied from $18.1 million to $19.2 million. The most loaned in a fiscal year came in 2007, when $5.1 million was dispersed.

“It was set so high it made it prohibitive,” said Ron Aldridge, director of NFIB Mississippi, an organization that advocates for small businesses. “It was above the federal rate, and it needs lowering to it can be utilized. We don’t want money just sitting in a fund that nobody wants to use. The PEER report proved that to be true.”

Loans made under the program have to be in connection with an identifiable project or business plan, with the principal not exceeding 50 percent of the total cost of the project or plan. Businesses can use the money to purchase land, buildings, equipment and inventory and for working capital. If the loans are applied toward working capital, the amount can not exceed one-third of the total loan value, or $50,000, whichever is less.

The loans cannot be used for speculative land or real estate investments, or for debt service. For eligibility, at least 60 percent of a small business must be owned by an individual who has lived in Mississippi for two years prior to the loan application being made. The related project also has to create or maintain full-time jobs.

Loan terms vary depend on the purchase. Building and land purchase or lease loans cannot have a term that exceeds 15 years; equipment purchase loans cannot stretch past 10 years; working capital loans have to be five years or shorter; and, inventory loans have to be satisfied within three years.

The maximum amount available under the program is $250,000.

“Having another opportunity available will certainly assist small businesses that are in need of those things,” Aldridge said. “Of course right now, that’s not a big issue for a lot of small businesses; they’re worried about the money that comes in their door to buy something. That’s the only money they’re interested in. They don’t want to spend any more money in terms of credit. They’re already on the edge on that end.”

Randy Kelley, executive director of Three Rivers Planning and Development District in Pontotoc, said his organization has just over $1 million available in its revolving loan fund. The 5 percent minimum interest has not done much to scare off small businesses in his area. Three Rivers applies a 5.9 percent APR to its Small Business Assistance loans.

“Obviously, sometimes you run into other things that are better deals,” Kelley said. “More times than not, (small businesses) they can get other financing. The deal is to provide the financing. Would it help some areas of the state? Absolutely. They’re just trying to make the program more effective statewide. I commend them for that. I have no problem with what (the bill) is trying to do.”

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