Iowa Business Growth Co. has a straightforward mission: Identify gaps in small business financing and fill them with innovative loan products to help drive economic development in the state.

Its newest tool to carry out that mission: $5 million in funding for small businesses available through the Iowa Capital Access Program (ICAP).

The program, funded by a federal appropriation to Iowa a year ago through the Small Business Jobs Act of 2010, is designed to enable banks to make riskier small business loans to businesses that are creditworthy but have been unable to get loans. Financial institutions can enroll loans of up to $500,000 in the program, which requires the lender and borrower to pay a combined 3 to 7 percent into a reserve account that’s matched with the federal funding.

A number of small businesses have expressed interest, but it’s up to the banks to decide whether they want to participate, said Dan Robeson, president of Iowa Business Growth Co. (IBGC), which is administering the program for the state.

So far, no loans have been made through the program, although similar programs have been successful in several other states. For instance, Michigan, which has operated a capital access program since 1986, has leveraged nearly $680 million in bank lending supported by $24.3 million in a public-private fund.

For Iowa, “this is a program that’s totally new to the state; there’s not been anything even remotely close to it,” Robeson said. “So everyone, including us, really looked at this thing long and hard. There’s a fairly narrow window for where it makes sense to use it.”

Because the loan-loss reserves are held by each financial institution making the loans, “it takes a bank willing to make multiple loans under the program to make it work.” said Steve Kruse, IBGC’s vice president. Ideally, an institution would hold reserves on at least 10 ICAP loans to spread out the risk, he said. IBGC has committed $200,000 of its funds, which it will use to help facilitate loans, such as helping a client to meet capital requirements for the program, Kruse said.

“One of the appealing things about the program is that you can put some oddball loans into it that wouldn’t necessarily qualify for an SBA loan,” Kruse said. One bank is considering using it to provide a helicopter loan for a crop-dusting business, he said. Nonprofit organizations can also borrow through the program.

John Sorensen, president of the Iowa Bankers Association, said the slow ramp-up of the new program is not unexpected, particularly given the economy.

“I think it’s the kind of program that will probably grow slowly, depending on the needs,” he said. “I think the biggest drawback is that it’s a new program, which means you have to familiarize loan officers with it.”

Additionally, banks are still challenged in finding loan demand, he said. “Businesses are still hesitant about borrowing money until consumer spending increases. I think we’re going to see that for a while.”

The association will offer an educational breakout session about ICAP during its annual convention Sept. 16 and 17.

IBGC had provided a handful of loans through another Jobs Act program that enabled small business owners to refinance mortgage loans with balloon payments coming due by the end of this year. However, that program ends effective Sept. 27.

“It’s too bad it’s maturing right now because I think we’re finally getting to the point where the banks are understanding it and it was starting to gain some traction,” Kruse said. It’s possible Congress may reauthorize the program next year, he said.

Iowa Business Growth Co. is just one of five certified development companies in the nation that is organized as a for-profit business rather than a nonprofit. Its shareholders are primarily Iowa-based banks. In keeping with its mission, it charges the least amount that SBA allows in 504 loan fees.

“We’ve considered the not-for-profit route, but we believe in the for-profit model,” Robeson said. “It makes us operate like our business partners that we finance. We’ve got to be nimble, paying attention to detail. “

“The success that we’ve had in 504 lending and market lending has allowed us to step up and take on this capital access program,” he said. “That program is not a money-making proposition for Iowa Business Growth Co. in any sense of the word. We’re doing it because our mission is economic development in the state of Iowa; it’s not shareholder return.”

Small Business Credit Initiative

WHAT IT IS:
$1.5 billion in federal funding to the states to strengthen their small business lending programs, provided by the Small Business Jobs Act of 2010.

GOAL:
To leverage up to $15 billion in new bank lending.

STATUS:
Iowa received $13.1 million through the program. In addition to the $5 million allotted to ICAP, the Iowa Small Business Loan Program received $3.1 million; $5 million went to the Iowa Economic Development Authority, which to date has approved $1.25 million in seed capital to three companies through the Iowa Innovation Acceleration Fund.