NEW YORK (MarketWatch) — Like many small businesses caught in the worst economic crisis since the Great Depression, Tri-State Biodiesel was struggling to find capital last year, in the middle of a credit crunch.

The Bronx-based company, which converts cooking-oil refuse from restaurants around New York City into fuel that it then sells, was in dire need of an equipment upgrade.

Brent Baker
Brent Baker, chief executive of Bronx-based Tri-State Biodiesel.

“Banks weren’t lending at all,” said Brent Baker, founder and chief executive. Baker said he went to three major commercial banks that had financed the company in the past. “Once the crisis hit, applications were suddenly more complicated and lengthy, and they all came back giving us all these euphemisms for ‘no.’”

In the end, Baker got a $50,000, three-year loan at a reasonable rate from Boc Capital, a lender that received $750,000 from the federal government thanks to the 2009 stimulus bill last year, to help small businesses just like Tri-State Biodiesel.

“The loan increased our profitability and put us in a position where we could expand,” Baker said, adding that his company hired ten more workers. “It shows how a relatively small amount of credit can be such a huge advantage, and we really did create jobs.”

When President Obama signed the American Recovery and Reinvestment Act into law in February 2009 to create jobs and promote spending, the law included $56.1 million for microloans for small businesses, to be doled out through the Small Business Administration through September.

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While some critics complain about the government’s economic stimulus efforts, some lenders and borrowers say the stimulus spending that focused on helping small businesses is working.

Targeted toward start-up, newly-established, or growing small businesses, the microloans are short-term loans up to $35,000 each for working capital or inventory and equipment purchases. The intermediary lenders who distribute the loans can choose to lend more than that limit.

The idea of microlending is more typically associated with loans in amounts as little as $25, disbursed to impoverished people in developing countries, ideally helping them to generate their own income to climb out of poverty.

But more recently, microcredit has become a mainstream practice in the U.S., and even though the average SBA microloan size is $13,000, the SBA’s program shares a similar mission as traditional microloan programs.

“While the microloan program is open to all entrepreneurs, the program especially supports underserved markets,” said Pravina Raghavan, director of the SBA’s New York District Office. This includes borrowers with little or no credit history, low-income borrowers, and women and minority entrepreneurs who generally don’t qualify for conventional loans or larger SBA guaranteed loans, Raghavan said.
More borrowers tap microlenders

SBA microloans are disbursed through specially-designated non-profit intermediary lenders across the country — a list of which can be found on the SBA website — that pay the SBA interest of about 1%.

The intermediaries themselves can pool funds together to lend as much as $50,000, and interest rates for the small-business borrowers, which are usually no more than 10%, are individually negotiated with the intermediary lenders.

“We were ready to expand our lending and the stimulus enabled the next round of lending to come in, and at much a lower interest rate that’s near zero,” said Nancy Carin, executive director of Boc Capital, one of 20 intermediaries servicing the New York area.

For Boc Capital, the stimulus doubled the microlender’s capital base while interest rates for the loans are as much as five percentage points lower. At the same time, demand rose, Carin said.

“We’ve been seeing some borrowers that in the past would’ve gotten financing though traditional banks,” she said. “Even successful businesses would see their sales fall by 30% and so they’d come to us.”

Banks were also in trouble after the crisis, adding to small business owners’ woes. In 2008, FDIC-insured banks endured losses of $12.4 billion, compared to a profit of $101.6 billion a year earlier, as 26 banks failed. Another 152 banks failed in 2009.

Faced with the deterioration of their balance sheets, banks become more wary of risk. They tightened credit lines and started refusing to make smaller, riskier loans.

Such was the post-crisis fallout that Accion USA, a national microlender that also distributes SBA funding, has seen a 20% increase in applicants nationwide this year compared to 2009, said Gina Harman, chief executive of Accion.

Nationwide, since the Recovery Act was signed, the average total dollar amount of microloans made each month has grown to $3.1 million, up from $2.5 million in 2008, said the SBA’s Raghavan. SBA intermediaries made 2,717 loans in 2009. In the New York City area alone, the SBA’s lending volume increased by 70% in a year.

Even with the dramatic rise in loans, microlenders such as Accion and Boc said they have kept repayment rates above 90%. Similarly, delinquency rates for the SBA microloan program have steadily fallen from 5.37% in 2007 to 4.73% this year.
Tips for small-business owners

Raghavan said small-business owners looking to borrow money should research the 20 intermediaries as each has different policies.

The lending process is “a very personal and intensive process that varies by the business and the nature of the request,” Accion’s Harman said.

Microlenders such as Accion even provide technical assistance — for which the stimulus allocated an additional $24 million — to help small-business owners prepare to obtain a loan.

Smaller SBA microlenders such as the Business Center for New Americans, which focuses on refugees and immigrants, frequently work with those who have no credit at all to help them get loans.

Up to 70% of BCNA’s borrowers are repeat borrowers, said Yanki Tshering, the center’s director, adding that the microlender is on track to make 200 loans this year compared to 112 in 2008 before the stimulus program.

Working first with a small-business service center to put documents in order speeds up the process considerably, said Accion’s Harman. The process of clearing up credit reports can delay loans for as much as six months to a year. But once loan officers are able to build a profile and complete site visits, a loan decision can be made within a week and the loan can be disbursed immediately, she said.

“It was an easy process. The application was only a page or two long,” said Ted Cooper, who owns Fresh Look Remodeling, a New York-based energy-audit business.

Struggling with working capital needs and faced with laying off his six workers, Cooper applied to a few big banks, one of which asked for $15,000 worth of collateral.

“If I had that, I wouldn’t have needed to borrow it,” Cooper said. At Accion, he said, “I didn’t have to put up my firstborn.”

Cooper received a $10,000, two-year loan from Accion’s Green Loan program, which offers unsecured loans to green businesses with SBA funding at a reduced 9% interest rate. “With the credit score I was working with, the rate was fantastic,” Cooper said.

Accion has a few guidelines, which includes a credit score above 575, but Harman said that such requirements aren’t set in stone.

“They are guidelines, but the key determinant is if the business is able to handle additional payments without crippling their business,” Harman said.
Small group of borrowers served

Still, according to a Congressional Research Service in 2010, only about 1% of small businesses are helped by these loans, and a separate survey showed small-business owners consistently place financing issues near the bottom of their most pressing concerns.

Just 5% of small-business owners said obtaining loans was a critical problem, according to a National Federation of Independent Business survey in early 2008 of 3,530 small-business owners.

But small businesses were simply more wary of taking on liabilities in turbulent times, said SBA’s Raghavan. According to an SBA study, more than half of the 736,000 jobs lost in the first two quarters of 2008 were lost in small firms.

“Small businesses that actually need credit have to rely on SBA support,” Raghavan said. “And when small businesses need credit, they really need it.”

“The important message is that we’re here,” Accion’s Harman said. “We’re making loans, and we encourage businesses not to give up hope if they have gone looking for capital.”

While consumers are now better protected than ever from unethical lending practices thanks to financial reform legislation that President Barack Obama recently signed into law, car buyers still need to be cautious when getting a car loan from an auto dealer.

Auto dealers, who act as middlemen for nearly 80 percent of all car loans, are exempt from oversight by the new Consumer Financial Protection Bureau, the cornerstone of the new law.

While dealers are regulated by the Federal Trade Commission and consumer protection agencies at the state level, many consumer advocacy groups have argued that this isn’t enough to stop the nation’s auto dealers from dubious lending tactics. In addition, dealers are also exempted from other federal laws, including the Truth in Lending Act, thanks to loopholes in those laws.

In fact, the Better Business Bureau receives more complaints about auto dealers than any other industry. What this means is car buyers should exercise caution when working with an auto dealer to help secure the car loan for their next vehicle. Here are three tips to ensure you are getting the best deal.

Get approved for a loan before visiting a dealer. Because a dealer is the middleman in the loan, the lenders it works with will quote them wholesale interest rates. Dealers are allowed to mark up those rates by up to 3 percentage points. Dealers generally don’t mark up a loan that much because the rate would no longer be competitive. But some dealers take advantage of car buyers who aren’t aware of what interest rate they qualify for by writing them a loan for a slightly higher rate.

To avoid this, get approved for your loan first. Shop around for the best rates online and via local lenders to see what’s the best rate you qualify for, then ask the dealer if he can beat it. If the automaker’s lending arm is offering zero percent or a low-interest rate, visit their website to get preapproved first, so you know if you qualify.

Don’t purchase any add-ons unless you really want them. Another way that dealers make money off a loan is by tacking on dealer options, such as VIN etching or extended warranties, sometimes without the buyer’s knowledge. Read your loan paperwork carefully to ensure that nothing extra has been added that you don’t want. If you do decide you want something extra, pay for it upfront to avoid the interest on the cost of that item.

Don’t sign any paperwork that says financing approval is a condition of the sale. We’ve all heard the stories of how a buyer drives away in his new car only to get a call from the dealership a few days later saying his car loan wasn’t approved at the current interest rate and that the sales contract needs to be rewritten at a higher rate. While these occurrences are unusual, they do happen, sometimes because of unethical dealer practices and sometimes because an overeager dealer thinks you’ll be approved for a rate that the lender turns down.

You can avoid this entirely by getting your car loan first, but if you decide to have the dealer facilitate the car loan, don’t sign a sales contract that says financing approval is a condition of the sale. Instead, ask the dealer to get finance approval from the lender first. It may mean a few extra days before you can drive home in your new wheels, especially if you are car shopping on the weekend, but when you do, you can be sure your loan with bad credit is secure.

Before you apply for any kind of small business loan – be it with the Small Business Administration, or SBA, a bank, or even family or friends — be prepared by gathering up all your bookkeeping, financial and other records. It will make the business loan application process less stressful and more likely to be approved by the lender. Here’s what you’ll need: Personal credit report. This is not for lenders, who can obtain this information on their own, but for you. Know your credit rating from one of the three major credit-reporting companies: TransUnion, Experian and Equifax. Once you get your credit report, make sure you dispute any errors, and be prepared to explain the reasons for late payments or defaults on your history. Business credit report. Just like your personal credit history, it’s important to look this over and correct any errors before you apply for a small business loan. Loan application form. Get this from the lender and fill it out completely. The questions on the form will vary from lender to lender, but basically questions include: Why do you need a small business loan? What are your plans for the money? What other business debt/creditors do you have? Business financial documents. Gather up your past tax returns (previous three years), one year of bank statements, a balance sheet, income statement, cash flow statement, accounts receivable and accounts payable. Business legal documents. Not all lenders require this kind of detailed documentation, but have it handy just in case: Any legal contracts with third parties. Licenses, registrations. Articles of incorporation. Lease agreements. Taxpayer ID number (proof of). Equipment inventory (with serial numbers). Collateral (cost/value of business — and personal — property that you plan to use to secure the loan). Proof of insurance for any collateral property or items. Gather all this information in one place to get it ready before you submit your small business loan application. You will have it at the ready — and create less stress and anxiety for yourself — if your lender requests it. But, remember, keep the process simple by only giving your lender the specific paperwork requested.

Too many borrowers may be unfairly blaming credit scores for their higher-than-expected loan rates or extra credit-card fees, according to a recent working paper.

The real culprit may be your own misunderstanding of how the lending process works, coupled with a failure to conduct adequate research before you apply, suggests the MIT Department of Economics working paper.

The paper, written by a team of Federal Reserve and university researchers led by Sumit Agarwal of the Federal Reserve Bank of Chicago, admits a FICO credit score may determine if you’re offered a loan. But other factors may contribute more heavily to your rate and fees.
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Take a home-equity loan or home-equity credit line: The greatest impact on your annual percentage rate is based on the “loan-to-value ratio,” the report said. That’s the percentage of the home’s appraised value that you’re actually borrowing.

Lenders often issue tiered annual percentage rates, based on loan-to-value ratios of 80% or less, 80% to 90% and 90% or more. So if you’re shopping lenders, expect any rate you’re quoted to be based on your home’s loan-to-value ratio.

Too often, the paper indicates, potential borrowers misestimate their home value and find themselves asking lenders the rates for the wrong loan-to-value category. Meanwhile, once you apply for a loan at the higher rate you’re quoted, loan officers often have discretion to give it to you — despite the fact that they typically have access to appraisal information that could place you in the correct loan-to-value ratio category at a lower rate.

Such a “rate changing mistake” can increase your APR by an average of 1.25 percentage points for home-equity loans and 1.50 percentage points for home-equity credit lines, the report says.

Avoid this scenario by asking in advance upon what variables the lender bases its rates. Assuming they are based on loan-to-value ratios, be sure to accurately estimate your home value before you shop for a loan. Lenders often have access to this information if you ask for it in advance. Web sites that also can provide estimates of this information include www.zillow.com and www.realestateabc.com.

Besides the loan-to-value ratios, factors that could influence your home-equity rates are whether you have a first mortgage, or, if your loan is for a condominium, which is considered a riskier property. Income and years on the job also may weigh in.

The paper also analyzed how 14,798 persons used lender teaser-rate credit-card offers for balance transfers. These offers have a very low teaser rate for six to nine months. Catch: Any purchases charged on that new card get a higher interest rate, and any monthly payments made to pay down the balance on that new card pay down the highest-rate debt last.

If you get such an offer, the best strategy is to transfer your balances to the new card and pay them down at the low rate during the teaser period, but make no new purchases on it. However, the researchers found that only about one-third of customers follow that strategy.

Instead, slightly more than one-third continued to make new purchases on the card every month, running up balances at the higher interest rate. The remaining one-third experienced a “eureka” moment between the first and sixth month, after experiencing surprisingly high interest charges. Only then, did they evidently stop the costly practice of making new purchases on the card.

The paper, “The Age of Reason: Financial Decisions Over the Lifecycle,” published by the Social Science Research Network, found credit scores have little impact on credit-card annual percentage rates or on auto-loan terms. It also noted that sophistication in making financial choices peaks at around age 53.

Among the other important variables that can affect how much you pay for a loans with bad credit:

1. Term. The longer the term, the higher the interest rates and/or fees and the more you typically pay. Shoot for the lowest term you can afford.

2. Home occupancy. For mortgages and home equity loans, you’re apt to qualify for better rates if you live in your home rather than rent a property or use it as a vacation home.

3. Amount you borrow. Home loans for amounts to $417,000, which may be sold to Fannie Mae and Freddie Mac, generally have lower rates than those with higher amounts.

4. Whether the rate is fixed or variable. Variable or adjustable-rate loans start out with lower rates, but have the potential to increase as much as interest rate caps, if any, permit.

5. Fees. If your rate is unusually low, look carefully for other fees. You may have upfront costs, points, annual fees or termination fees.
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Auto Loans with Bad Credit

6.92% (60-month, new car)
7.67% (36-month, used car)
Here’s a look at the state of auto loan rates from Bankrate.com’s weekly national survey of large banks and thrifts conducted June 23, 2010.

Auto loan rates were flat this week. The average rates for 48-month new-car loans with bad credit and 60-month new-car loans each stayed put at 6.95 percent and 6.92 percent, respectively. Used-car rates also idled in place; the 36-month used-car was unchanged at 7.67 percent.

Pure electric automaker Tesla unveiled plans for a slew of new electric vehicles, including a van, a crossover and a cabriolet, according to Autoblog.com. CEO Elon Musk revealed the plans for three new vehicles in his pitch for the company’s initial public offering. The new vehicles will all be built on the platform developed for its Model S sedan, which is set to go on sale in 2012.

To find updated auto rates in your area, visit Bankrate’s auto rate table.