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Minnesota's Small Banks Deserve Credit for Keeping Entrepreneurship Afloat

November 16, 2009 By Lee Egerstrom, Economic Development Fellow
Given all that's happened on Wall Street, it is difficult to salute financial institutions for what they did leading up to and during the past two year's of financial crisis. That overlooks great work being done here in Minnesota and next door in Wisconsin for which salutes are in order.

A great disparity exists among states when it comes to using federal program tools to stimulate the economy and keep entrepreneurs in business. This was noted in mid summer by small business consultant and business blogger Mike Clough who reported that Minnesota and Wisconsin accounted for nearly 30 percent of American Recovery Capital (ARC) loans through the U.S. Small Business Administration (SBA).

What's more, said Clough, at one point in the summer Minnesota ARC loan applications represented half of all filed with the SBA.

The ARC loan program provides loans up to $35,000 for small business operators to manage cash flow and other expenses as they cope with the recession. Specifically, they are no-interest, deferred repayment loans that allow business owners to pay down existing debt, thus serving like a bridge loan to get small businesses through temporary economic challenges.

ARC loans were authorized by the American Recovery and Reinvestment Act (ARRA). The ARRA was one of the first stimulus pieces of legislation tackled by Congress when it reconvened in January and was signed into law by President Obama in February.

That ARC loans and other SBA loans and guarantees are keeping doors open at Minnesota small businesses does give credence to government claims that economic stimulus measures are working and saving jobs. Just how many are hard to project; careful research would need to establish what would have happened without the loans, and that would be a subjective assessment by either the business owner or the researcher.

Nevertheless, there is evidence these programs are working in Minnesota.

SBA Administrator Karen Mills was in Crystal on Sept. 23 to acknowledge Minnesota use of ARC loans and other Recovery Act measures to help small businesses weather the recession. By that time, SBA had supported $337.4 million in guarantees and direct loans to more than 1,000 Minnesota businesses, and SBA was seeing weekly volume increases.

In a news release accompanying her visit, the SBA said more than $10 million in ARC loans were disbursed to about 700 Twin Cities small businesses.    

At the same time, ARC and other SBA programs are being widely accessed and used throughout rural Minnesota where small community banks are trying to keep their main street businesses open, said Edward Daum, district director for the U.S. Small Business Administration in Minnesota.

Minnesota leads the nation in using these SBA tools. Wisconsin is a close second. And it drops off sharply after that despite far larger populations and economic challenges in about half the other U.S. states.

Why is that?

That's not easy to explain. Clearly, there are several factors that come into play.

Clough, a former president and owner of several small to mid-size companies in Minnesota and other states and now an especially active volunteer with the SCORE business consulting nonprofit, says two key factors can be quickly identified.

First, he said, Minnesota is blessed with a lot of small community banks that want to keep their communities together during the recession even though they don't make a lot of money participating in SBA programs. Second, he said, is the awareness of these programs that comes from other small businesses accessing SBA loans and from consulting groups and organizations encouraging use of these programs.

"On top of that, you've got especially aggressive SBA personnel in Minnesota and Wisconsin reaching out to business owners and banks," Clough added.

Daum supports Clough's theories. "We get tremendous support from community bankers. The Initiative Funds and community groups encourage our programs. And we do an enormous amount of education work. We're on the phone every day with bankers and lenders," he said.

More than 450 Minnesota banks and lending institutions participate in SBA loan programs, he added.

The two biggest banking institutions in Minnesota, Wells Fargo and U.S. Bank, are also big users of SBA programs, he said. That also eliminates any institutional resistance that might be in play in other states.

And various state and local groups encourage use of SBA programs. That is especially true of Small Business Development Centers around Minnesota that are mostly based at Minnesota State Colleges and Universities (MnSCU) campuses and financially supported by federal SBA and state economic development funds. It also includes consultancy programs like SCORE.

A lot of positive forces come together to make it work in Minnesota - and Wisconsin. SBA's Daum offers a pretty simple rationale:

"We need it. Our economy needs it. We got to do it."

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