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December 2010
Published by the Community
Development and Policy Studies Division
of the Federal Reserve Bank of Chicago

Also in this Issue

Small business
development in Indiana
Engaging corporate
leaders and promoting
economic development in
Milwaukee

Small businesses in
the Midwest to benefit
from Jobs Act
Credit supply and demand in
the auto industry

Chairman Bernanke’s speech
at the Detroit meeting

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INTRODUCTION

					

December 2010

In this edition of Profitwise News and Views, we focus on efforts to promote small business development and lending in
various ways and locations. Our featured article is a summary of information from a series of Seventh District forums that
began on May 19 in Davenport. At the June 3 event in Detroit, Fed Chairman Ben Bernanke offered a keynote address
(included here in its entirety), as well as candid observations on the ways to increase lending in the current tough economic
environment. The Chicago Fed’s conference series was part of a broader Federal Reserve System initiative and national
conference series entitled “Addressing the Financing Needs of Small Businesses.” The article includes commentary from the
SBA and from executives in the auto supply industry who discuss credit needs in their industry to support innovation and
research and development, as well as operations.
“Small Business Development in Indiana: Growing a Diversified Economy through Innovation” provides a look at a cross
section of state sponsored programs to support small enterprises – in particular, businesses involved in creating new
technologies – and create jobs in the state of Indiana.
Finally, “Engaging Corporate Leaders and Promoting Economic Development in Milwaukee” outlines a variety of initiatives
and financing strategies to engage emerging businesses with well established industrial organizations, promote workforce
development and retention, and a wide array of services for both employers and employees to facilitate workplace
effectiveness and success.

Profitwise News and Views

December 2010

1

ECONOMIC DEVELOPMENT

Addressing the financing needs of small
businesses in the Seventh Federal
Reserve District
by Jeremiah Boyle
Addressing the Financing Needs of
Small Businesses is a Federal Reserve
System initiative designed to inform
policymakers on the issues that restrict
the flow of credit and opportunities to
improve the flow of credit to small
businesses. A widely held view among
policymakers and other observers is that
economic recovery and prospects for job
growth will falter if small businesses
cannot meet payroll, pay suppliers, and
invest in innovation and expansion.
As part of this national initiative, the
Community Development division of the
Federal Reserve Bank of Chicago held
meetings in Davenport, Iowa;
Indianapolis, Indiana; Milwaukee,
Wisconsin; Detroit, Michigan; and
Chicago, Illinois. These meetings
highlighted the challenges banks face in
providing credit to small businesses and
the challenges that small businesses
face in financing their operations and
investing in future growth.
The flow of credit to small
businesses from commercial banks
declined dramatically through the
financial crisis and recession.
Policymakers at every level face the
challenge of identifying the most
efficient measures and programs for
promoting small business development
and job growth. An informed discussion
about these policies depends on a
greater understanding of the dynamics
of both the supply of and demand for
credit. That discussion also depends on
2

Profitwise News and Views

knowledge of the programs and
interventions that work well, which do
not work (as well), and the most
promising emerging programs 		
and policies.
This article summarizes key ideas
and presentations aggregated from five
meetings hosted by the Federal Reserve
Bank of Chicago exploring:

• the small business role in the
Midwest economy;

• the supply of credit to small
•
•

businesses;
the credit needs of entrepreneurs
and small businesses; and
how various stakeholders have
responded to help facilitate greater
access to credit, capital, and
opportunity for small businesses.

Small business in the Midwest
economy
William Testa, vice president and
economic advisor at the Federal
Reserve Bank of Chicago, provided an
overview of the national and Midwest
economies and the role that small
business plays in the Midwest economy
at the Milwaukee and Chicago meetings.
U.S. Small Business Administration
(SBA) statistics show that in Illinois,
firms that employ less than 500 people
account for close to half the
employment in Illinois. Testa emphasized
the “symbiotic relationship” between
large firms and small companies in the

December 2010

Midwest economy. “We can see that
with our auto suppliers,” Testa said,
“three supplier jobs exist in auto parts
for every one assembly job. Similarly, our
corporate headquarters and small firms
all trade with one another to make a
robust, wealth-generating economy.”
Employment in the Midwest fell faster
than the nation’s employment during the
recent recession as, “our manufacturing
roots betrayed us here,” Testa said.
While the national unemployment rate
remains stubbornly high, and the
Midwest’s unemployment rate is higher
still, Testa suggested that the Midwest’s
manufacturing roots may be a benefit in
the recovery because, “manufacturing is
very much leading the recovery here
and in the nation,” and many Midwestern
manufacturers are able to export to
growing international economies. Also
providing some support to the recovery
are: consumers and households are
repairing their balance sheets; business
investment in equipment and technology
is beginning to come back; “the job
market is breathing;” and the financial
sector is repairing itself.
The problem for this recovery is that
it represents a shallow recovery after a
very steep decline due, in part to, “all the
wealth that was destroyed with the
financial recession that we experienced.”
Housing inventories, mortgage
delinquency rates, and the prospect of
more home foreclosures act as a drag
on the recovery. And, a central piece in

ECONOMIC DEVELOPMENT
the access to credit puzzle is the
lingering issue of commercial real estate
loans on community banks’ books.
Testa presented some evidence that
demonstrates both a reduction in
demand for small business credit and a
reduction in the supply of credit from
banks. “Loans are more risky,
delinquency rates are up, and lenders
assert that there is not the demand by
creditworthy borrowers. They’ve had to
tighten their standards given the risks.”
Prospective borrowers, Testa explained,
“say that credit isn’t as available on . . .
favorable terms.” Finally, Testa referred
to “pure supply effects” from bank
failures and other banks’ efforts to
repair their balance sheets and raise
capital in an adverse environment.
Federal Reserve Board Chairman
Ben Bernanke noted that, “outstanding
loans to small businesses dropped from
almost $700 billion in the second
quarter of 2008 to approximately $660
billion in the first quarter of 2010. An
important but difficult-to-answer
question is, how much of this reduction
has been driven by weaker demand for
loans from small businesses and how
much by restricted credit availability?”
(see full text of Chairman Ben
Bernanke’s speech on page 5).
Representatives of the National
Federation of Independent Businesses
(NFIB) participated in the meetings in
Indianapolis, Indiana, and Milwaukee,
Wisconsin. In each case, they presented
the findings of the NFIB’s report, Small
Business Credit in a Deep Recession.1
According to the NFIB, 55 percent of
small businesses attempted to borrow in
2009, and only 40 percent of those
attempting to borrow reported that their
credit needs were fully met. Forty-five
percent of small businesses seeking
credit in 2009 reported that none or only
some of their credit needs were met.
Also from the NFIB study: small
business owners cited financial
institutions changing the terms of
existing loans (10 percent), lines of credit
(29 percent), and business credit cards

(22 percent) in 2009. The most frequent
change was increased interest rates. 2
As illustrated in exhibits 1 through 4,
the data and trends present a “mixed
bag.” “We can see tighter standards,
less flow of credit, and a little bit of
mixed signals on the part of businesses.
Or, perhaps, it’s not the most important
impediment to expanding businesses,
hiring, investment for small businesses,
but it’s still a major concern,” Testa said.

Supply of small business credit
Although they face growing
competition from a range of emerging and
alternative providers, “commercial banks
and other depository institutions . . .
remain the most important supplier of
credit to small businesses in the United
States.”3 The depth of the recent
recession and the impact of the financial
crisis continue to have dramatic effects on
the banking sector. Federal Reserve Bank
of Chicago Vice President of Supervision
and Regulation Ray Bacon provided an
overview of trends in the banking industry
in each of the five states in the Seventh
Federal Reserve District.4 The “pure
supply effects” (that Testa referenced
above) have to do with bank performance,
operations, and the regulatory
environment in which they operate.

Bank performance
As the data presented in Table 1
show, from 2008 through the first
quarter of 2010, there were 80 fewer
financial institutions in the Seventh
District. Of the surviving banks, one
out of three banks in Indiana,
Michigan, and Wisconsin; one in four
banks in Illinois; and one in seven
banks in Iowa is under some form of
stress. “That does not mean they’re on
the brink of failure,” Bacon
emphasized. “It means that they’ve got
weaknesses with respect to their
capital, asset quality, management
difficulties, earnings, or liquidity.”
Bank earnings, seen in Table 1, also
provide some insight on why some
banks may not be in a position to

provide the same level of credit that they
may have in the past. Pre-provision net
revenue (PPNR) is essentially the
operating income of a financial
institution. If a bank is not making
money through operations, it is not
building capital and, consequently, its
ability to lend is diminished. Through the
peak of the financial crisis in 2009, 41
percent of Michigan banks lost money
and 27 percent of Illinois banks lost
money, for example. While bank
performance had shown significant
improvement in the first quarter of 2010
– as measured by both operating
income (PPNR) and return on average
assets (ROAA) – Michigan and Illinois
still had 26 percent and 18 percent of
banks, respectively, losing money on an
operating basis.
The realities of the broader economy
have led to declining asset values. Many
banks, therefore, must raise capital to
cover their losses and/or reduce the
assets they carry on the balance sheet by
taking on fewer loans. Several banks in
the Midwest hinted that capital was just
beginning to return to the banking sector
after “a couple of very tough years.”

Bank regulations and oversight
Recurring anecdotes in high-profile
hearings and the popular media include
some version of, “I know someone who
never missed a payment and their loan
was foreclosed, or their line of credit
was not renewed.” Many bankers assert
that there is greater uncertainty in
regard to how assets will be classified,
conflicting examiner protocols, and
increased regulatory scrutiny. A series
of policy statements and regulatory
guidance issued by the federal banking
agencies between November 2008 and
February 2010 were designed to
provide clear guidance to examiners and
bankers alike and promote prudent
lending to creditworthy businesses.
At the meeting in Detroit on June 3,
Chairman Bernanke stated the message
underlying the interagency policy
statements: “while maintaining

Profitwise News and Views

December 2010

3

ECONOMIC DEVELOPMENT
Table 1
Earnings
# of Institutions

Stressed

Dec 31,
2008

March 31, Change Institutions
2010

Iowa

361

348

-13

1 in 7

Illinois

570

534

-36

Indiana

111

101

Michigan

143

Average Total Assets

March 31,
2010

% Neg
ROAA

% Neg
ROAA

March 31,
2010

Change

%
Change

155,699

167,322

11,623

7%

13.07%

7.10%

1 in 4

583,444

541,256

-42,188

-7%

26.92%

18.08%

-10

1 in 3

528,542

548,606

20,064

4%

22.12%

9.71%

128

-15

1 in 3

755,587

394,557

-361,030 -48%

40.46%

25.78%

Wisconsin 249

243

-6

1 in 3

549,463

538,412

-11,051

23.17%

11.79%

Total

1,354

-80

1,434

Dec 31,
2008

Dec 31,
2008

-2%

SOURCE: Federal Financial Institutions Examination Council (FFIEC), Consolidated Reports of Condition and Income.
NOTES: There are “pure supply effects” from bank failures and banks’ efforts to repair their balance sheets and raise
capital in an adverse environment.
appropriately prudent standards is
critical, at the same time lenders must
do all they can to meet the needs of
legitimate creditworthy borrowers.
Doing so is good for the borrower, it is
good for the lender, and it is good for
our economy.”5

reasonable range of future conditions,
rather than overly optimistic or
pessimistic cases.” 8

Chairman Bernanke emphasized
that, “the communication that we have
had with banks and our examiners is to
try to eliminate artificial barriers. For
The November 2008 statement
example, we often see small
“directed supervisory staffs to be
businesses being excluded in a sort of
mindful of the pro-cyclical effects of
new form of redlining. We don’t want to
an excessive tightening of credit
see that. We want to see every
availability and to encourage banking
borrower evaluated on their potential
organizations to practice economically and on their ability to repay the loan.
viable and appropriate lending
And in particular, the decline in the
activities.” 6 The October 2009
value of collateral shouldn’t be the
statement makes clear that, “renewed
decisive factor if they can generate the
or restructured loans to borrowers who cash flow.” 9
have the ability to repay their debts
Some banks were concerned about
according to reasonable modified
a
broader
range of changes in
terms will not be subject to adverse
classification solely because the value regulations and government programs
beyond the issues covered in the
of the underlying collateral has
declined to an amount that is less than regulators’ policy statements.
the loan balance.” 7 The February 2010 Specifically, bankers at all of the
meetings, while discouraged by the
statement suggests that “lenders
uncertainty of ad hoc extensions of
should understand the long-term
SBA program waivers and higher rates
viability of the borrower’s business,
of guarantees, universally supported
focus on the strength of a borrower’s
extension of those SBA program
business plan, and analyze a
improvements implemented under the
borrower’s performance over a
American Recovery and Reinvestment
4

Profitwise News and Views

December 2010

Act of 2009. A discussion of SBA
programs appears later in this article.
A banker in Davenport, Iowa, pointed
to the prospect of interest rate caps and
interchange fees as proposals that
would exacerbate credit contractions.
He also noted that Financial Accounting
Standards Board’s Statement No. 166
may have a “real negative impact on
community banks’ ability to sell loan
participations.”10
The same banker in Davenport
conveyed the sentiment of many of the
bankers that participated in the
conference sessions around the country.
In spite of the challenges in both the
financial industry and in the broader
economy, “Our bank is well capitalized;
we have low levels of non-performing
loans and we are highly liquid. We are
profitable and we are making money.
We have money to lend and we want to
lend it.”
Daryll Lund, president and CEO of
Community Bankers of Wisconsin,
raised an emerging concern among
community banks. “I talk to bankers
around the state and we talk a lot about
credit quality and impact on the banks’

ECONOMIC DEVELOPMENT

Chairman Bernanke’s speech at the Detroit meeting - June 3, 2010
BEN S. BERNANKE: I am pleased to be here in Detroit to be part of an
ongoing and very important discussion about improving access to credit for small
businesses. I would particularly like to thank the staff of the Federal Reserve Bank
of Chicago and President Evans for organizing this event.
Today’s meeting is part of a series of more than 40 such gatherings that the
Federal Reserve System is conducting across the country. Entitled Addressing
the Financing Needs of Small Businesses, these forums are designed to
elicit ideas and information that will help the Federal Reserve and others
respond effectively to both the immediate and longer-term concerns of small
businesses. Today’s event brings together representatives from banks and other
private lenders, community development financial institutions, bank supervisors,
other federal and local government agencies, and small business trade groups.
Each of you brings an important perspective to this issue, and I would like to thank all of the participants for their
willingness to share their ideas.
Over the past two years, a concerted effort by the Federal Reserve and other policymakers has helped to stabilize
our financial system and our economy. Following a sharp contraction in late 2008 and early 2009, we are now in the
fourth quarter of economic expansion, with jobs once more being created rather than destroyed. Nonetheless, important
concerns remain. One particularly difficult issue is the continued high rate of unemployment. High unemployment
imposes heavy costs on workers and their families, as well as on our society as a whole. I raise this issue here because
healthy small businesses, including start-ups as well as going concerns, are crucial to creating jobs and improving
employment security.
Unfortunately, lending to small businesses has been declining. Indeed, outstanding loans to small businesses
dropped from almost $700 billion in the second quarter of 2008 to approximately $660 billion in the first quarter of
2010.1 An important but difficult-to-answer question is how much of this reduction has been driven by weaker demand
for loans from small businesses and how much by restricted credit availability. To be sure, the distinction between
demand and supply is not always easy to make. For example, some potential borrowers have been turned down because
lending terms and conditions remain tighter than before the financial crisis, perhaps reflecting banks’ concerns about
the effects of the recession on borrowers’ economic prospects and balance sheets. From the potential borrower’s point
of view, particularly a borrower who has been able to obtain loans in the past, these changes may feel like a reduction in
the supply of credit; from the lender’s point of view, the problem appears to be a lack of demand from creditworthy
borrowers. Although lenders and borrowers may have different perspectives, our collective challenge is to help ensure
that creditworthy borrowers have access to credit so that, should they choose, they can expand their businesses or
increase payrolls, helping our economy to recover.
At the Federal Reserve, we have been working to facilitate the flow of credit to viable small businesses. We helped in
bringing capital from the securities markets to small businesses through the Term Asset-Backed Securities Loan
Facility – the TALF program. Our bank stress tests of a year ago also drew private capital to the banking system, which
helped offset credit losses and provided the basis for increased lending. I know that earlier in this conference you heard
about the various interagency policy statements issued to banks and examiners, reinforcing our message that, while
maintaining appropriately prudent standards, lenders should do all they can to meet the legitimate needs of creditworthy
borrowers. 2 Doing so is good for the borrower, good for the lender, and good for our economy. We have also conducted
extensive training programs for our bank examiners, with the message that encouraging lending to small businesses
that are well positioned to repay is positive, not negative, for the safety and soundness of our banking system.
As we continue to examine the factors affecting small business lending, our thinking will be shaped by information
from diverse sources. For example, our most recent Senior Loan Officer Opinion Survey on Bank Lending Practices
suggests that, for the first time since the crisis began in 2007, most banks have stopped tightening credit standards. 3
We also know, from the survey conducted by the National Federation of Independent Business that while only 8 percent

Profitwise News and Views

December 2010

5

ECONOMIC DEVELOPMENT
of small businesses list access to credit as their principal immediate economic problem, just 40 percent of small
businesses attempting to borrow in 2009 had all of their credit needs met.4
Surveys like the two I just mentioned are informative, but getting a full picture also requires hearing from knowledgeable
people with diverse perspectives on these issues. Meetings like this one allow us to gather intelligence we and others can
use to facilitate the flow of credit to small businesses – for instance, by identifying specific credit gaps, clarifying examiner
expectations and procedures, improving coordination of small business support services, and ensuring the availability of
technical assistance for loan applications. Thus we can help ensure that small businesses are able to participate in and
contribute to the recovery. The findings from the entire series of meetings sponsored by the Federal Reserve will be
presented at a culminating conference at the Board of Governors in Washington later this summer.
Learning from people engaged with small businesses and small business credit, like those here today, is vital if we
are to make progress. I look forward to hearing your ideas and concerns, and thank you again for joining us.
1 Data are from the Federal Financial Institutions Examination Council (FFIEC) Consolidated Reports of Condition and Income (Call
Report), where small business loans, as reported in the Report forms FFIEC 031 and 041, schedule RC-C, part II, are defined as loans
with original amounts of $1 million or less that are secured by nonfarm nonresidential properties or commercial and industrial loans.
Correction: On July 27, 2010, this footnote was revised to remove “plus loans with original balances of $500,000 or less for agricultural
production or secured by farmland.”
2 For example, see Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union
Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Conference of State Bank Supervisors
(2010), “Regulators Issue Statement on Lending to Creditworthy Small Businesses,” joint press release, February 5.
3 See the April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices available on the Board of Governors’ website.
4 See William J. Dennis, Jr. (2010), Small Business Credit in a Deep Recession (Washington: National Federation of Independent
Business, February).

ability to compete. But the next thing
bankers say is, ‘I can’t keep going with
the compliance anymore. When I’m
doing more work on regulatory issues
than meeting with my customers, there’s
something wrong.’ And I think it’s time
that banking regulators consider a tiered
system, for compliance oversight.”
“My biggest concern coming out of
Washington right now is [the] Consumer
Financial Protection Bureau,” Lund said.
“If we get another agency looking over
the shoulders of our bankers, you’re
going to see a consolidation in this
industry that will make heads spin,
which will directly impact business
lending in this country. And I think it
would be a travesty in this country to
see an accelerated consolidation of
banks primarily because of the
regulatory burden.”

Credit constraints on certain industries and
demographic groups
Throughout the meetings, several
presenters highlighted credit constraints
within certain industries or among
6

Profitwise News and Views

minority- and women-owned businesses
that emerged or were exacerbated
during the credit crisis.
Alfred Ramirez, president of the
Greater Quad Cities Hispanic Chamber
of Commerce, cited research done by
the U.S. Department of Commerce that
shows that even though minority-owned
firms create jobs at a similar rate to nonminority firms, minority firms struggle
with many disparities. Minority-owned
firms: have less family wealth with which
to finance business ventures; have lower
equity investments in their businesses;
are less likely to apply for a loan; are
more likely to be denied a loan; and tend
to receive a lower loan amount than
their majority counter parts.11
Mr. Ramirez summarized the
constraints that minority businesses
face in accessing capital and credit for
small businesses: “Experience,
geographic location, lower sales and
industry sectors limit capital access.
There is a correlation between being in
a lower-income neighborhood,” Mr.
Ramirez said, “and only being able to

December 2010

accumulate wealth or build a business
according to what that market will bear.”
Small suppliers highlighted unique
constraints on the supply of credit in the
automotive industry. Meeting
participants noted that lines of credit for
those suppliers were “systematically”
frozen in 2009 and that the industry
restructuring poses unique risks for
lenders because “there remains a
concern over a supplier’s control over its
own destiny.” But the suppliers also
noted that formulas used to assign value
to collateral, “have gone from ‘orderly
liquidation value’ to ‘forced liquidation;’”
further reducing suppliers’ ability to
borrow. (See Credit Supply and Demand
in the Auto Supplier Industry, on page
12 for a more complete summary of the
auto industry discussion).

Demand for small business credit
While changes in the supply of credit
for small businesses appear to be more
quantifiable and, therefore, more easily
documented, demand for small business

ECONOMIC DEVELOPMENT
credit seems to be much more subject
to interpretation. Both banks and small
business participants noted that
economic conditions have weakened
demand for credit. The NFIB survey
cited above indicates that 51 percent of
business owners identify slow or
declining sales as their most immediate
economic problem with 22 percent
citing “uncertainty” as the most
immediate problem.

Exhibit 1
Senior loan officer opinion survey
(percent of banks tightening C&I loans)

C&I loan rate spread over Fed
funds rate (4-quarter moving average)

100

5
Less than $100K

4
50

$100k - $1M
Large/Mid Firms

3
Q3/2010

There was general agreement at
these meetings that economic
conditions had a negative impact on
sales, revenue, balance sheets, and
asset values for many small businesses,
weakening overall loan demand for
small businesses. Small businesses
agreed that they are more cautious
about seeking credit, and banks indicate
that more of the applications they do
see are of generally lower credit quality.
Nonetheless, many businesses argued
that credit gaps remain. As discussed
above, the NFIB study showed that only
40 percent of small businesses who
sought credit had their credit needs fully
met; 23 percent of NFIB respondents
indicated that they were not able to have
any of their credit needs met.
Some of the meeting participants had
very specific stories of businesses that
seemed particularly creditworthy that
were unable to obtain credit. A small
business participant in Davenport
related the story of his family’s real
estate development business. During
the 2001 recession, the business was
growing but the bank somewhat
arbitrarily called the company’s line of
credit and effectively drove the company
into bankruptcy. As the son and current
owner worked to revive the business, he
could not get access to credit at any
bank until he took on an outside partner
that was deemed creditworthy.
Another business owner in Davenport
told a compelling story of how lucky he
was in 1979 to find a small town
community banker to help him figure out
how to get his business started. Back
then, he had no experience, no

0

Small Firms
Q3/2010

-50

2

More than $1M

1
Q3/’97

Q3/’02

Q3/’07

Q1/’90 Q1/’95 Q1/’00 Q1/’05 Q1/’10

AAA Corporate Bond 10 yr Treasury Spread (percent)

Business loan delinquency rate
(percent)

3.0

14

2.5

12

Sep/2010

10
2.0

8

1.5

6

Q2/2010

C&I

4
1.0
0.5

CRE

2
Jan/90 Jan/95 Jan/00 Jan/05 Jan/10

0

NOTES: Higher delinquency rates led to tighter lending standards and “rate spreads”
reflect the market pricing for increased risk.
SOURCE: Federal Reserve Board and Haver Analytics.
collateral, and little money, but he
qualified for an SBA loan, obtained help
from suppliers, and started the business.
Today, 30 years later, that business is an
anchor in the community, and its
owners, a husband and wife team, have
a successful business, much collateral,
and an opportunity to expand.
Given the strength and solvency of
his business, credit, and financial
position, as well as long-standing
relationships with bankers throughout
the community, he was stunned at how
difficult it was to borrow a relatively
small amount of working capital to
expand. His point: “If it’s this hard for me

to get a loan, how many prospective
opportunities are being lost because
marginally less attractive borrowers are
being simply turned away.”
William Beckett, president and CBO
of Chrysalis Packaging and Assembly
Corporation (CHRYSPAC), a
manufacturing services company in
Milwaukee, emphasized that in the
absence of bank credit, small
manufacturers and suppliers are
becoming each other’s banks.
“Receivables have gone up and we have
passed that on because so have our
payables. So we’ve been borrowing from
each other. I’ve met people who have

Profitwise News and Views

December 2010

7

ECONOMIC DEVELOPMENT
board room, and the corporate 		
supply chain.”

Exhibit 2
Reporting that credit was harder to get
than last time (net percent reporting, SA)

Expecting credit conditions to ease
(net percent reporting, SA)

Senior loan officer survey - Consumer
(percent of banks tightening standards)

Consumer loan delinquency
(percent)
8

80
60

6

Credit Cards

Credit Cards

40
20

Q2/2010

4

Other Loans

Consumer Other

2

0
Q4/2010

-20

0

NOTES: Prospective borrowers say that credit is not as available at favorable terms.
SOURCE: National Federation of Independent Business, Federal Reserve Board,
and Haver Analytics.
customers who pay in 180 days. So my
first recommendation is to pass a law,
‘Pay in 30 days or pay interest.’”
Beckett acknowledged the
weakened position in which many
surviving businesses find themselves.
He then made a strong case for a
return to “character” lending: “Any small
business standing today, after this
recession, really does know how to run
a business, because if they didn’t know
how to run a business, they would not
be here, period . . . those are the people
who need to be financed. Those are the
people you should be taking the risks
on because those are the people who
are smart enough to manage cash flow;
8

Profitwise News and Views

who know how to work with suppliers
to stretch payment terms; who know
how to gently beat up customers to get
them to pay faster; and who know how
to keep their employees faithful		
even as they cut payroll to
manage expenses.”
Gloria Castillo, president of Chicago
United provided evidence that some
creditworthy businesses in Chicago are
not getting access to the credit they
need to seize on current growth
opportunities. Chicago United’s mission
is to “ensure the inclusion of people of
color in the regional economy in
Chicago through greater diversity in the
corporate workforce, in the corporate

December 2010

The corporate leadership of Chicago
United developed a program called Five
Forward in which CEOs commit to
selecting five minority businesses with
whom they will do business for five years.
Chicago United will track the revenue
growth of the minority businesses and
the jobs those minority businesses create
in communities of color. Castillo
explained that, “this means we have a
unique group of minority business
enterprises that have gone through very
significant vetting processes with large
corporations who have committed to
doing business with them over a period
of five years.”
Ms. Castillo asked the minority
businesses in the Five Forward
program about their recent experience
in pursuing credit. Of these, 23 percent
have not been able to get the credit
they need. Another significant
proportion are using personal savings,
credit cards, and loans from friends and
family because they have given up on
pursuing more traditional sources of
small business credit.
Castillo related two specific
examples: one company owner in the
program told of his experience last year.
After a 20 year credit relationship with a
large financial institution, this company
was not able to renew its credit line. The
explanation was that the condition of the
services industry made the firm too
risky. For six months, the company
worked with credit cards and other nontraditional sources of funding until they
were able to connect with another local
lender that made the loan.
Another Five Forward company has a
new contract in hand with a Fortune 500
company and needs to “ramp up” to fulfill
the contract; but this company is
struggling to find the financing. Again,
this is a well-established company with a
good credit history.

ECONOMIC DEVELOPMENT

Small businesses in the Midwest to benefit from Small Business Jobs Act
by Marianne Markowitz, SBA Region V Administrator
Region V includes the states of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin
Throughout my Midwest region I see the challenges that small businesses face finding resources. Many of these
challenges will be met thanks to the small business provisions in the Small Business Jobs Act signed by President
Obama into law this past September. These provisions will help small businesses succeed in the current tough
marketplace, and create jobs.
It is important to remember that after the Recovery Act passed in February 2009, the Small Business Administration
(SBA) was able to help about 70,000 small businesses get loans with reduced fees and increased, government-backed
guarantee of 90 percent. It was a good investment. We turned 680 million taxpayer dollars into more than $30 billion in
lending support. Also, while many lenders were pulling back from small business lending, more than 1,300 banks and
credit unions came back to SBA to make loans. This provided more points of access to capital in their communities at a
critical time. Borrowers report saving or creating hundreds of thousands of jobs.
The Small Business Jobs Act builds on this success. First, the Act creates about $12 billion in tax cuts. These are
targeted to small business owners so they can strengthen their business and create jobs. There are too many small
businesses still having trouble getting the loans they need to grow. That’s why we extended the SBA’s Recovery loans.
To date we have funded more than 1,400 small business owners like Dr. Tom Wake of Hyde Park Animal Clinic in
Chicago. Dr. Wake was in our loan queue, waiting for this bill to become law. Today, Dr. Wake can use that loan to
expand his facility and better serve his clients.
In addition to the extension of Recovery lending, a number of other provisions portend expanded access to capital.
Some are permanent and some are temporary, including several stipulated by the President. First, we will permanently
increase the maximum loan sizes in our top two programs from $2 million to $5 million, and from $4 million to $5.5
million for 504 manufacturing related loans. We know this will help those who need more capital to quickly create jobs.
This includes manufacturers, exporters, contractors, franchisees, and others. We will also permanently increase the
maximum size of our microloans from $35,000 to $50,000. This is important because our data shows that microloans
often benefit entrepreneurs who need startup capital and business owners in underserved communities who often find
it harder to get loans.
In addition, there are two important temporary changes that will help small business owners. We will increase (until
September 27, 2011) the maximum amount of our SBA Express loans from $350,000 to $1 million. Express loans use a
streamlined application process. They usually take just a few days to turn around. With this higher cap, we will be able to
put even more working capital in the hands of small business owners very quickly. That will help them develop business,
buy inventory, and, in many cases, hire new workers.
We are also going to allow (until September 27, 2012) some small businesses to refinance their owner-occupied
commercial real estate mortgages into our 504 program. Many of their mortgages will mature in the next few years, and
face balloon payments as a result. With real estate values well down, many of these business owners will have trouble
getting a bank to refinance them. Allowing small businesses to refinance into a new 504 loan will provide the business
owner with more stable financing. And, for the lenders who hold those mortgages, it will free up capital to make more
small business loans. We expect to roll out 504 refinancing after we’ve implemented the larger loan sizes I mentioned
earlier. We know that many small business owners looking to refinance will need those bigger loans. After we complete
the regulations and program guidance (in four to six months), we know it will be an important tool for thousands of small
business owners across the country.
We look forward to putting these tools in the hands of the Midwest’s small businesses in the weeks, months, and
years ahead.

Profitwise News and Views

December 2010

9

ECONOMIC DEVELOPMENT
Exhibit 3
Senior loan officer opinion survey (percent of banks reporting stronger
demand for C&I Loans)
60
40
20

A banker pointed out that, while the
participants in the Chicago Urban
League’s programs may not have
received credit from a bank, directly, he
was present at the creation of the Next
One program. Cautioning that banks
should not all be painted with the same
brush, he reminded participants that
some of the “alternative” programs that
support small businesses are
themselves frequently supported and
funded by traditional banks.

0
-20

Q3/2010

-40
-60
-80

1997Q4

2002Q4

2007Q4

NFIB: Single most important problem (net percent reporting, SA)
40

Alternative sources and promising
programs and developments

30
20
Oct/2010
Poor Sales

10
0

Financial and Interest Rates

Jan/’86N

Mar/’90

May/’94

Jul/’98

Sep/’02

ov/’06

NOTES: Banks report weaker demand and small business reports that sales and revenue
are more important issues than credit.
SOURCE: National Federation of Independant Business, Federal Reserve
Board, and Haver Analytics.
Ms. Castillo concluded that, “Contrary
to the opinions that all minority firms are
small, new, not stable, don’t have a
customer base that can support them; that
is not the experience of Chicago United
companies. We are working with some of
the top firms and we are still seeing really
significant challenges to credit.”
Likewise, the Chicago Urban
League’s Entrepreneurship Center has
an extensive training and coaching
program called “Next One” that helps
growing minority enterprises in many
ways. Gustave “Gus” Tucker, vice
president of Entrepreneurship at the
Chicago Urban League, described three
10

traditional lending.” Brewer emphasized
that the Next One program engages the
technical assistance capacities of the
Business Schools at Loyola University,
Northwestern University, University of
Chicago, and the University of IllinoisChicago to provide assistance and
expertise to participating businesses.

Profitwise News and Views

businesses that were only able to
finance recent growth opportunities
through a fund that the Chicago Urban
League had created to “make sure that
the money gets to the folks that really
need it and don’t have access through
some of the more traditional means.”
Herman Brewer, acting president and
CEO of the Chicago Urban League,
echoed Gloria Castillo’s point that
businesses working with the Urban
League – like those working with
Chicago United – “are not just walking
in and sitting down with us and filling
out loan applications and looking for
ways to bridge their positions with

December 2010

As noted in the discussion of supply
and demand for small business credit,
many businesses are surviving by using
alternative sources of credit: personal
credit cards and other personal sources;
adjusting terms on both payables and
receivables; factoring; and payday
lending. The U.S. Small Business
Administration’s America’s Recovery
Capital (ARC) Loan program12 was
discussed in several meetings as both
an example of a cumbersome
application and approval process that
could use improvement and, in many
cases, a critical bridge through the crisis
that saved businesses and jobs.
Unlike the ARC Loan program, which
was never intended to become a
permanent alternative, several types of
organizations and programs have
assumed a new or more prominent role
in providing greater access to small
business credit.

Community Development Financial
Institutions (CDFIs)
Debra Schwartz, director of program
Related Investments (PRI) for the John

ECONOMIC DEVELOPMENT
D. and Catherine T. MacArthur
Foundation, a long-time investor in
community development financial
institutions, noted that she has
participated in many conversations over
the years about why Chicago does not
have a more robust set of financing
vehicles for small businesses. She
noted that Citibank had committed
$200 million to small business
financing through the Opportunity
Finance Network, and the Calvert
Social Investment Foundation and
Goldman Sachs had committed $300
million to help CDFIs finance small
business development. Ms. Schwartz
encouraged the meeting participants to
“think about how to mobilize to access
that large pool of capital and about
ways to create vehicles to bring that
kind of resource to Chicago.”
In Detroit, Assistant Treasury
Secretary Michael Barr highlighted the
Obama Administration’s deployment of
small business resources through the
Treasury Department’s CDFI Fund. “At
Treasury we are trying to expand the
available set of resources to small
business lending including through
working with the Fed on the set of
programs that the Chairman described.
Trying to bolster the CDFI field both
through our direct CDFI fund, which is a
$250 million fund that supports local
CDFIs around the country, as well as
through the initiative that the Chairman
mentioned briefly, which is a capital
infusion program for CDFIs having
difficulty because of the financial crisis
that lets them match private investment
into CDFIs with federal dollars and to
bolster their capital base to do more
small business lending.”
Federal Reserve Chairman Ben
Bernanke commented on the benefit
that CDFIs can play in facilitating
access to credit in underserved
communities. “In general, CDFIs perform
a very important function of helping
mainstream lenders get insight into lowand moderate-income communities
where they may not have the information

Exhibit 4
NFIB: Borrowing needs satisfied (borrowers only)

45

12

40

10
8

35
Oct/2010

30

4

25
20

6

2
Jan/‘04 Jan/‘05 Jan/‘06 Jan/‘07 Jan/‘08 Jan/‘09 Jan/‘10

0

NOTES: Small businesses that seek credit report their credit needs are not
being fully met.
SOURCE: National Federation of Independant Business and Haver Analytics.
or the contacts to make good loans. But
I like the CDFI approach,” Bernanke
said. “I always liked it because it is so
hardheaded. It really tries to find real
business opportunities and to show
people that there are opportunities in
what otherwise look like distressed
communities, and that’s why I am very
much in favor of continued support for
that sector.”

Micro-lenders
Sharon O’Donoghue, executive
director of Business Ownership Initiative
of Indiana (BOI) made a compelling
case for the important role that microlending and micro-enterprise assistance
play for families, communities, and
businesses. BOI is a nonprofit, microenterprise organization that serves
“individuals who are trying to start or
grow a business for their household
income. The majority of them are using
self-employment as a means of ‘income
patching’ – resorting to a means of selfgenerated income.”
“There’s a little bit of disconnect in
Indiana between workforce development
and sole proprietor entrepreneurship,”
O’Donoghue argued. “Self-generating
income has a role in long-term

economic sustainability. We work with
individuals reentering society after
incarceration and people returning to
work after a long-term illness.”
Ms. O’Donoghue shares a story as
an example of how micro-enterprise
has been successful with underemployed and unemployed individuals.
“A woman came to us from Valparaiso
where for three years she’d been
unemployed because of a medical
illness. She had a master’s in nursing.
She’d been the head of an intensive
care unit. Four years into a medical
illness, we were able to help her get
certified and get a microloan to buy the
equipment to do medical billing out of
her house. She now generates over
$32,000 in net profit to pay herself.
Still living with a chronic illness, it
doesn’t matter if she submits insurance
bills between midnight and 4 a.m.,
when she’s feeling better. Although
she’s not able to work in a conventional
workforce she was able to move off of
disability payments.”
Further expounding on BOI’s selfsufficiency focus, O’Donoghue said,
“People tend to think folks either have a
wage employment job working for
somebody or they own their own

Profitwise News and Views

December 2010

11

ECONOMIC DEVELOPMENT

Credit supply and demand in the auto industry
The automotive supply chain offers an industry-specific case study that illustrates supply and demand dynamics for
small business credit, as well as both short-term and structural credit gaps. In the automotive industry, as with the
economy, “healthy small businesses are crucial to creating jobs and improving employment security.”1 It has been noted
that there are three auto supplier jobs for each assembly job.2 And, as Ron Bloom, senior counselor to the President for
Manufacturing Policy, said, “Credit runs through the lifeblood of this industry, in some ways, more than just about any
other industry.”
Chrysler and General Motors declared bankruptcy on April 30 and June 1, 2009 (respectively). The $5 billion
Automotive Supplier Support program was created to provide receivables financing for auto suppliers, while GM and
Chrysler worked though the bankruptcy process. Both companies emerged from bankruptcy, and production has begun
to increase, but conventional financing has been slow to return to the industry.
On June 3, 2010, representatives of the auto suppliers, financial institutions and government sat down to discuss the
credit issues facing the industry. Timothy Manganello, Chairman and CEO of Borg Warner, indicated that the Tier One
suppliers have access to cash and can support a ramp up to meet increased production demand. Manganello says that
the capacity and financial liquidity of the second and third tier suppliers will govern how much additional production
capacity the industry can absorb.

Supply
Dave Andrea, senior vice president of the Original Equipment Suppliers Association (OESA), noted that most OESA
members “believe their bankers are treating the current negative change in cash flow as temporary due to the economic
conditions. However, the vast majority did report issues relating to banks’ current assessment of assets backing current
loans or assets being assessed for new loans.” It was noted that in 2009, lines of credit for auto suppliers were
“systemically” frozen and that banks that had historically been providers of credit to auto suppliers have continued to
limit their lending. Andrea concedes that the industry’s ongoing restructuring continues to pose a risk for lenders
because “there remains a concern over a supplier’s control over its own destiny.”
Nonetheless, the auto suppliers highlighted, through their own experiences, that credit has been restricted in many
ways, especially lines of credit that are reduced, priced higher, or are renewed for more limited periods of time. A
particular concern for all of the suppliers was the values place on collateral, particularly equipment. Andrea quoted one
OESA member saying, “formulas used to assign value have gone from ‘orderly liquidation value’ to ‘forced liquidation;’ a
devastating drop off.” Another meeting participant, describing the experience of renewing his company’s line of credit,
said, “If you thought the real estate market was bad, try the equipment industry. It was ugly. We saw our borrowing
capacity evaporate.”

Demand
Demand for credit in the auto supply chain is growing. “Car and light truck sales are projected to improve in 2010,
with sales at 11.6 million units, and they are expected to improve to 13.3 million units in 2011” – up from 10.4 million
units in 2009. 3 Meeting participants noted that in addition to projected demand increases, new model launches require
up front investments in retooling in the lower tiers of the supply chain well in advance of when cash flow from
manufacturer production begin to flow.
The CEO of one supplier described his company as “on the bottom tier, dealing with both the middle market
industries and small community banks.” He noted that most of the manufacturers in the auto industry have restructured
so that they are profitable. “Everyone is surprised at how quickly the industry has restructured,” he said, “but the
companies at the bottom still struggle, and they rely on community banks to provide working capital and to buy their
equipment.”Ron Bloom agreed, noting that the White House Auto Task Force is aware that help for the industry has
come from the top down, but that the bottom still needs help.

12

Profitwise News and Views

December 2010

ECONOMIC DEVELOPMENT
OESA’s Dave Andrea summed up the credit gap issue for auto suppliers, noting that, “Credit availability for all the
required tooling to support new vehicle launches is constrained given the continued level of industry, customer and
supplier risk. And it is these very programs that will improve the industry’s risk/return ratios and investment
attractiveness.” He went on to emphasize “the need for coordinated action by industry, the financial community and the
government to minimize the transition costs of the industry’s restructuring and the economic cycle to assure a viable
manufacturing sector to high value-creating employment and technology development.”
The Michigan Economic Development Council is working to help alleviate that credit gap through its “Michigan
Supplier Diversification Fund.” Paul Brown, the Fund’s director, described the program as providing both collateral
support and helping to facilitate cash flow. In certain situations, the fund will “deposit money on behalf of the borrower,
in the lending bank. We (the state) get interest on the deposit; we charge the borrower some points on it at closing. That
gives the banks fully collateralized loans as well as increasing deposits, which helps impact some of the other issues
that some of these smaller banks have.”

Innovation Capital
Near the conclusion of the meeting, Federal Reserve Board Chairman Ben Bernanke noted that, “We want to make
sure that there’s innovation capital as well as working capital. We need to have a longer-term perspective as well as the
more immediate perspective on the issue.”
One meeting participant concurred with the Chairman, saying, “Unfortunately, sustained technology advancements
depend on the availability of longer-term financing for the same small businesses that struggle daily to finance working
capital and long overdue replacement of basic equipment.”
While Chairman Bernanke added his observation regarding “innovation capital” in his concluding remarks, several
meeting participants accepted the Chairman’s challenge and offered their responses in follow up, written commentaries.
Dave Andrea, senior vice president at the Original Equipment Supplier Association: “In consideration of this challenge,
for the auto supplier sector I truly believe the most significant hurdle for innovation capital is on the public policy side
and not the monetary policy side. First, we need to have better visibility, or at least consistency, in the underlying energy
and environmental policies that drive consumer as well as industrial market demand for new technologies. Without
clarity of CAFE, fuel prices, greenhouse gas reduction, etc., the technology road map becomes very complicated,
investment payoffs uncertain, and the financial community’s risk increases dramatically.
Second, there are also tax policies that would support innovation – these come in the form of making R&D tax credits
permanent so that long-term development costs will be known and speeding up depreciation schedules such that the
suppliers’ significant capital investment can be turned over more quickly.
Third, there are also opportunities to leverage the national laboratory system better – there may be a way to better
align ‘pre-competitive’ research within the lab system with the industry needs. Here OESA has formed a Technology
Forum to provide a conduit between the federal lab system and the supplier industry to provide a mechanism for such
alignment. Given the industrial lab system of the GMs and the other OEMs and suppliers has been scaled back
significantly, there is a role for the fed lab system to perform the ‘heavy-lifting’ of advanced product and process
technology development. This idea ties back to the need to clarify CAFE, fuel prices, greenhouse gas reduction, and
other policies. If we have stability in policy then the federal government can provide targeted funding through the labs
(and/or companies) that move these national objectives and subsequent industry requirements along a reasonably
defined technology road map where the financial community can judge risks and rewards.”
Jim Bradbury, president, Grand Rapids Controls Company, LLC: “I agree with Mr. Bernanke’s remarks regarding
innovation capital, it needs to be readily available. I fear that monies, if they become available, will be primarily restricted
to energy conservation and electric cars. I differ from this point of view as this thinking is far too narrow. In many of the
alternative power segments the USA has fallen behind our European counterparts and we are playing catch up. What
would it look like if the U.S. was the world’s innovation engine for most products and services?

Profitwise News and Views

December 2010

13

ECONOMIC DEVELOPMENT
We are the most creative nation in the world, yet we support [research and development] very poorly in relation to
other nations. As it stands now I believe our current funding is far below globally competitive levels for R&D product
development. We need to support R&D at the base level in the second and third tier suppliers where innovation can
happen fast. We need to protect the innovation we develop and prevent other countries from copying it. That will allow
us to generate high paying jobs and be the envy of the world.
Last year when the government offered loans for innovation in key “green” areas they were surprised by so many
requests for small loans by small companies. The U.S. companies are different than our Asian and European
counterparts where the sub-tier suppliers are the innovators/experts compared to the European and Asian OEMs being
the innovators. As a result more dollars should be made available to this group in comparison to the OEMs.”
Rick Brown, vice president of Finance at Saturn Electronics & Engineering: “Historically, the United States has
demonstrated global innovation leadership. However, I believe we are losing ground as a nation and we better find a way
to accelerate our R&D activity or risk losing that incredibly valuable worldwide competitive advantage.
Small business has consistently proven to be the primary incubator of new ideas that are routinely filtered out by the
big companies due to perceived risk and poor ROI targets. Innovation capital is critical for small businesses to remain
entrepreneurial in providing tomorrow’s technological solutions.
Unfortunately, sustained technology advancements depend on the availability of longer-term financing for the same
small businesses that struggle daily to finance working capital and long overdue replacement of basic equipment. If
you’re diving in 80 feet of water and your air runs out, your next breath is way more important than say, dreaming up a
propeller redesign to save on boat fuel next year.
I believe bank’s standard methods used to determine credit worthiness are already out of synch even for short term
financing decisions. So unless lenders are willing and able to make significant and realistic changes, which I believe is
not likely, access to longer-term innovation cash will remain essentially impossible and public-sector financing will be
required.
One immediate and practical plan might be to invoke a government funded version of the research grant concept
combined with an ‘X Prize’ approach, sans SBA-type approval and monitoring barriers and delays. Admittedly over
simplistic, but I think it would work within our urgent timeframe, and I’ll volunteer to help.
Regarding requested ideas for addressing the financing needs of small business, I would like to repeat the rather
technical tax item I mentioned at the luncheon.
I believe it was Mr. Michael Barr who indicated that Treasury was about to recommend to the Hill, among other
things, reinstatement of the ‘Bonus Depreciation’ tax deduction. This represents a significant benefit to manufacturing
companies but with a slight tweak can be immensely more powerful as a financing conduit to small businesses.
Essentially the bonus depreciation deduction allows an additional tax deduction of 50 percent of the cost of new
equipment for the year it is placed in service. The problem is that this deduction can’t be monetized until the tax return is
filed well into the following year and long after the related equipment is paid for. I would like Treasury/Congress to
consider allowing bonus depreciation to be used to reduce current year quarterly tax payments or to be used
immediately to refund taxes paid in prior years.”
Curt Lansbery, president and CEO of North American Tool Corporation: “While I believe these types of innovations
are important and that innovative capital is something that needs consideration, I believe that issues of this nature can
be incentivized through tax incentives and special consideration that the government gives for developmental issues.
For all of us in business, the more important subject is how to stay in business. That is not possible unless we have
the kind of working capital, short term lending, and continued bank support that we have seen in the past. The issue
with small businesses lending is that banks are going back to their old habits of lending to companies on performance
and asset based lending, and there is nothing wrong with this.

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Profitwise News and Views

December 2010

ECONOMIC DEVELOPMENT
Even this type of lending is being challenged by the demands of the FDIC and their demands for stronger capital
requirements and higher insurance payments to meet the demands of failed banks. The FDIC is also requiring the
downgrading of what had previously been good loans but were stressed through the downturn. This process has also
hampered the banks’ ability to provide credit for many businesses.
It is this borrower’s belief that the banking system is not an administrative tool to be used for the benefit of the
administration’s initiatives. The banking system has traditionally been a system to provide orderly lending to businesses,
providing growth and services in our communities. This has been done by the oversight of the government. I do not
believe that the banking system is an organization that the government should use to direct its administrative goals.
If small businesses are not able to get the funding they need to sustain their organizations, then no matter what the
administration’s goals are, whether it’s electric cars, windmills, what have you, they will not be accomplished.”
Wes Smith, president and CEO of E&E Manufacturing: “If innovative capital refers to funds for job training and industry
diversification, that is clearly an important aspect of financing but is not the foundation for recovery in the manufacturing
sector, in part because it is speculative rather than concrete revenue. A small or medium sized manufacturer does not have
the ability to spend several years developing a new technology or spending tens of thousands per employee to train to
manufacture for a potential customer. Middle market manufacturers like us are a just in time industry that rely more on
customer demand than OEM would on the end-consumer demand. For example, many federal policymakers are pushing
small manufacturers to diversify and take on more ‘green’ business. However, the demand simply does not exist in that
industry to justify a manufacturer to invest capital and borrow money if there is not a current ‘bankable’ contract to be had
in the short term. We will only invest in retraining or purchasing a new piece of capital equipment if we have a clear path to
a contract because our margins are so slim we do not have the ability to seek ‘prospective’ capital. As to R&D investment,
much of research and development work conducted by middle market manufacturers is done on behalf of a current
customer who is asking for a new solution/configuration. For our just in time delivery industry, we cannot sit on inventory –
whether raw materials, finished product, or idle labor. I am also not sure there are many financial institutions who would lend
to a middle market manufacturer in this environment unless they can demonstrate bookable business based on the loan for
training, innovative technologies, efficient equipment, etc.”
1 Chairman Ben S. Bernanke at the meeting on Addressing the Financing Needs of Michigan’s Small Businesses, Detroit,
Michigan, June 3, 2010. www.federalreserve.gov/newsevents/speech/bernanke20100603a.htm.
2 Klier, Thomas, and James Rubenstein. 2008. Who Really Made Your Car?: Restructuring and Geographic Change in the Auto
Industry. (Upjohn Institute for Employment Research).
3 Strauss, William, senior economist and economic advisor, Federal Reserve Bank of Chicago, June 7 2010. Solid Economic
Growth Expected in 2010 and 2011, According to Chicago Fed Automotive Outlook Symposium Participants. www.
chicagofed.org/digital_assets/others/events/2010/automotive_outlook_symposium/aos_press_release.pdf.

business and work for themselves and
get paid by themselves. The Kauffman
and Mott Foundations and Aspen
Institute have shown that income
patching is the new reality.”
“I’m a good example,” Ms.
O’Donoghue explained. “I’m the
executive director of a not-for-profit. I
get a W-2 for my salary. I also am
asked to do some consulting work. I
own my own company that generates
an income that supports a household.
Very few households are able to
support themselves on two incomes
from conventional employment.”

BOI was brought into a local hospital
to meet with their employees, to show
how they can do some other business
on the side. “They recognize that $7.25
an hour does not pay the bills and does
not lift a family out of poverty,” she said.
“Micro-enterprise also spawns
something you can’t capture
economically: an educated worker.
There’s nothing more impactful than
having people think like entrepreneurs:
be adaptable, be flexible, be problemsolving, be client-oriented. Companies
are finding that micro-enterprise
training produces a more motivated,
energetic, and engaged employee.”

“Micro-lending can improve behavior
and practices that help our clients
engage with commercial lending
institutions. They’re often individuals
who have multiple oars in the water so
you have a higher percentage that truly
transform their lives,” O’Donoghue
stated. “We can continue to help these
individuals with a coherent plan to
integrate micro-lending with the other
asset building strategies.”
“In plain English,” she summarized, “it
doesn’t do any good to give somebody
$1,500 to buy two floor scrubbers
unless those two floor scrubbers allow

Profitwise News and Views

December 2010

15

ECONOMIC DEVELOPMENT
the borrower to go get five janitorial
accounts, which then result in $1,500
plus owners’ salary and at the end of the
year, the family actually increased their
household income by $8,000 to
$12,000. Unless impact or outcome
metrics are tied to job creation and
business revenues, we’re not turning
that corner of micro-lending to actually
increase household income.”
Micro lending funds talked about not
having traditional lending requirements.
With character-based lending, personal
attributes are certainly taken more into
consideration or weighed equally with
what we call traditional lending attributes
like credit scores. Micro-lenders know
that credit scores are limited. A microlender will be more interested in knowing,
“Has the rent been paid on time for 12
months? Have the utilities been paid? I
pay my utility bills on time for three years,
but that doesn’t impact my credit score.
Possibly it should,” Sharon O’Donoghue
said. So micro-lending tends to look at
different things. For micro-lending to play
a positive role in improving access to
small business credit, micro-lending
needs to be reported to the credit
bureaus. “You’re not going to improve
people’s credit scores; you’re not going to
affirm new behavior in financial literacy
unless the effort results in a higher credit
score,” O’Donaghue concluded.
Several micro-lenders and microenterprise assistance groups commented
that demand for both loan funds and
management assistance had risen
through the financial crisis and recession.
Barbara Eckblad, from Wisconsin
Women’s Business Initiative Corporation
(WWBIC), reported that “First quarter,
year-over-year 2010 over 2009, our
request for capital is up 309 percent. We
are just swamped with those small
businesses that are looking for capital.”
WWBIC is a not-for-profit, whose
mission, as Eckblad explained it, is to
“work with low- to moderate-income
people who have a dream of starting
their own business or who have a
business that we can help them sustain
16

Profitwise News and Views

or grow.” WWBIC is also seeing changes
in the types of businesses that are
seeking its assistance. “It used to be
about 30 percent existing businesses
and 70 percent new business starts. It is
almost completely flipped.” Now, as Ms.
Eckblad explained, “It is about 30 percent
of people who want to start their
business and 70 percent existing
businesses asking for our help to keep
their business open.”
Likewise, Accion Chicago reported a
40 percent increase in demand for its
lending. ACCION’s Jill Stephens
explained that ACCION Chicago
“provides loans up to $25,000 to small
businesses. Our average loan size is
$8,000 and our current portfolio is $1.5
million. We expect to write off about 8
percent of our active portfolio. Our clients
are 65 percent minority, 54 percent
female and 73 percent low- or
moderate-income.”
Ms. Stephens said that ACCION is
also seeing other changes in its client
base. “We’ve also seen an increase in our
median credit score from about 600 to
630, not because we changed our
lending standards on the lower end, but
we’ve seen more clients that were
formerly bankable coming to us for
smaller loans at this point. So we’ve seen
clients with 700 credit scores, which
we’ve never really seen in the past.”
Just as Indiana’s Business
Opportunities Initiative found evidence of
its program’s support for families,
ACCION has documented its success
with communities. “We recently
conducted an impact study and found
that our loans help create or maintain 2.6
jobs per loan and that 89 percent of our
clients are still in business, which we
found really heartening since the study
was conducted during this recession,”
Stephens reported.
Both BOI and ACCION highlighted
the more general trends found in the
Aspen Institute’s estimates that, “there
are 10 million microenterprises in the
country and that micro-lenders have

December 2010

only reached about 1 percent of that
market. In terms of credit gaps, we feel
that there is less lending going on in the
$25,000 to $100,000 range.”
Nonetheless, ACCION and WWBIC
were also clear about ongoing credit
gaps. According to ACCION’s Stephens,
“Although we’re the largest micro-lender
in the Chicagoland area, we’re frankly
not that large. So we feel that there’s a
lot of potential for other micro-lenders
to come in, for us to expand, and for the
other micro-lenders that are already out
there to expand. A final credit gap we
see is that we provide term loans,” noted
Stephens. “We don’t provide lines of
credit or overdraft lines, and that’s
another product that our clients
especially could really benefit from and
really need.”
WWBIC’s Barbara Eckblad pointed to
some unique challenges that nonprofit
lenders face. “WWBIC doesn’t get
funding for loan loss reserves. We have
to find grant money, people who believe
in us to give us the money to put into
our loan loss reserve that we are
required to have for CDFI and SBA
reserve ratios,” Eckblad explained. “We
have enough capital because we have a
relationship with the SBA and we have
other capital coming in through EQII
(Equity Equivalent Investment) and CRA
money. What we really need is to
somehow fund that loan loss reserve so
we can lend more money.”
All of the nonprofit lenders
highlighted the Community
Reinvestment Act as being particularly
important for programs. ACCION’s Jill
Stephens said that, “The Community
Reinvestment Act has been very
important to our industry in terms of
getting us the capital that we need and
helping us to form partnerships with
banks. It’s been a wonderful help to us.”
Fed Chairman Bernanke highlighted
CRA’s role during the Detroit meeting.
“We are looking at CRA issues. Banks
lend to low- and moderate-income
communities as part of their

ECONOMIC DEVELOPMENT
responsibility under CRA, and we
continue to discuss how to define that
and how that should be applied, but that
is another source of potential funding.”

Credit unions
Michigan’s Commercial Alliance,
formed in 2004, is a Credit Union
Service Organization (CUSO). The
Alliance is owned by the credit unions
and it services the credit unions’
business needs. Terry McHugh,
president of Commercial Alliance,
explained that the Alliance provides
training, underwriting, documentation,
servicing, and loan administration for
credit unions in the state of Michigan.
“We are one of three such
organizations in this state. We currently
service about $125 million worth of
loans and we currently have 12 credit
unions that we’re providing these
services for,” McHugh explained. “In
1998 NCUA issued a regulation,
limiting business lending in a credit
union to 12.25 percent of their total
assets. That obviously created issues
for the industry as far as putting
together a commercial lending
backroom operation to service that
product line.” The Commercial Alliance
also offers a loan participation network
to diversify the risk of business lending.

the game of small business lending at
this point. We are actively collaborating
to assist in the economic turnaround in
Michigan through our ongoing education
and experience with our members.
While credit unions represent a nominal
position or portion of the small business
lending pie, we do represent a long
history of successfully serving our
membership base.”

State and local programs
McHugh also highlighted the
creation, in early 2010, of an initiative
called the Credit Union Small Business
Financing Alliance. Governor Granholm,
in concert with the Michigan Credit
Union League, unveiled the lending
partnership with more than 30
participating credit unions in the state
who pledged an additional $43 million
to the initiative.
State and local governments have
been stepping up their efforts to
support local business lending.

Cara Castallano, a staff member from
the City Treasurer’s Office in Chicago,
explained that office’s two loan
programs. A Linked Deposit program in
which the city makes a deposit with an
institution and the institution commits to
lending out half of that amount to small
businesses. They are working to modify
“We booked over $40 million in new
the program because their own review
loans in 2009, and our average loan is
of the program found that “the linking of
about $300,000. Our loans range from
the deposits wasn’t changing anybody’s
$15,000 up to $3 or $4 million. While
behavior,” Castallano explained. The
the vast majority of the financial industry participating banks “were already
was pulling back from small business
making these small business loans
lending in the last year,” according to
regardless of the commitment they
McHugh, “Michigan credit unions
signed with the Treasurer.” Castallano
increased their lending to small
also observed that, “participating
businesses by 18 percent, still a
bankers want to make loans; it’s a
relatively small number. Nationally, the
matter of finding qualified borrowers.”
credit unions increased their exposure
The second loan program Castallano
by 10 percent.”
highlighted is a Micro Loan program.
McHugh summarized the Commercial “We have about $3.2 million – allocated
Alliance’s recent experience. “Over the
by the City Council – to leverage small
last year and a half, we have probably
business lending only. We piloted the
booked the best loans that we have in
program with ACCION and we got some
our entire portfolio. We’re very much in
really good feedback after the first six

months. The loans made were between
$10,000 and $150,000. ACCION only
does $10,000 to $25,000, and $10,000
really wasn’t low enough for the
community. So the City Council recently
passed an ordinance lowering the
minimum loan amount to $500.”
The Michigan Economic Development
Council (MEDC) is another example.
MEDC is working to help alleviate that
credit gap through its “Michigan
Supplier Diversification Fund.” (See the
Auto Supplier sidebar for further
details.)
Treasury Assistant Secretary
Michael Barr also highlighted the
importance of state programs in the
Federal response to business credit
issues. “As some of you probably know,
the President has been pushing very
strongly a new set of proposals through
the Congress to provide more seed
funding for small business lending, a
$30 billion initiative, to provide low-cost
capital to the banking sector for
increasing small business lending.
Together with a $20 billion initiative
designed to expand the work that
states are doing all over the country.
Michigan has been a real leader in this:
in loan funds, loan guarantees,
collateral-enhancement programs, and
capital asset programs to bolster small
business lending.”
Small Business Development
Centers (SBDCs) also participated in
each of the meetings. The general
consensus is the SBDCs are a valuable
resource for both bank and borrowers.
However, the SBDCs also highlighted
some of the ongoing challenges that
small business service providers face.
Many meeting participants noted the
challenge of businesses exhausting
their personal and business resources
before seeking assistance. Many
participants also commented about the
uneven knowledge within financial
institutions about the resources that
are available in the community.

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December 2010

17

ECONOMIC DEVELOPMENT
ACCION Chicago’s Jill Stephens
implored, “We urge large financial
institutions to train their employees on
alternatives that are out there: microlending options, training options,
government programs that exist to help
small businesses.”
Chinwe Onygoro noted the challenge
of staying current with federal, state,
local, and private programs that have
proliferated. Onygoro is the president of
O-H Community Partners, the creator of
an Internet site called New Equity
Business, an online search engine for
small business to learn more about all
the different financing that is available
in Illinois. (New Equity Business will be
profiled in an upcoming issue of
Profitwise News and Views.)
“What we’ve seen in the
marketplace,” Onygoro explained, “is
that there are a number of SBDCs,
entrepreneurship centers, and other
business and technical assistance
organizations that are very strong in the
area of coaching small businesses
around getting loans and credit, but may
not necessarily have deep expertise in
providing and coaching for new market
tax credits and for TIF works and for
other programs that were mentioned
earlier. We’re trying to deepen the
network of providers that are available
and visible to small businesses that can
really coach them through, if they’re
eligible, the application process for
these tools,” Ms. Onygoro explained.

Conclusion
Federal Reserve Chairman Ben
Bernanke said, “It is easy to talk in
general, but it is much more valuable to
hear some of the specific concerns,” in
the communities. “I think I would end
with a little bit of guarded optimism. We
have seen some improvement. The
survey of loan officers suggests that
the tightening process is ending and
that some banks are beginning to
loosen their terms a bit becoming a bit
more confident. We are seeing loss
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Profitwise News and Views

rates stabilize, many banks returning to
profitability, some improvement in the
economy as I mentioned before, so
obviously we still have a long way to go.
Again, I want to assure everybody that
the Federal Reserve views this as being
absolutely central to the recovery, both
in the economy broadly and particularly
in employment, and we will continue to
pay close attention to this issue. I am
hopeful,” Bernanke concluded, “we will
see improved conditions for credit
going forward.”

Notes
1 Dennis, William, Jr. 2010. Small Business Credit in a Deep Recession. NFIB Research
Foundation. www.nfib.com/Portals/0/PDF/AllUsers/research/studies/SmallBusiness-Credit-In-a-Deep-Recession-February-2010-NFIB.pdf.
2 Author’s notes from Addressing the Financing Needs of Indiana Small Businesses.
May 20, 2010.
3 Ou, Charles, and Victoria Williams. 2009. “Lending to Small Businesses by Financial
Institutions in the United States,” in Small Business in Focus: Finance: A Compendium
of Research by the Small Business Administration’s Office of Advocacy. www.sba.
gov/advo/research/09finfocus.pdf.
4 The Federal Reserve’s Seventh District covers all of Iowa and most of Indiana, Illinois,
Michigan, and Wisconsin.
5 Chairman Ben S. Bernanke, “Brief Remarks” at the meeting on Addressing the
Financing Needs of Michigan’s Small Businesses. Detroit, Michigan. June 3, 2010.
6 Interagency Statement on Meeting the Needs of Creditworthy Borrowers. November
12, 2008. www.federalreserve.gov/newevents/press/bcreg/20091112a.htm.
7 Prudent Commercial Real Estate Loan Workouts. October 30, 2009. www.ffiec.gov/
press/pr103009.htm.
8 Federal Reserve Board of Governors. February 5, 2010. Interagency Statement on
Meeting the Credit Needs of Creditworthy Small Business Borrowers www.
federalreserve.gov/newsevents/press/bcreg/20100205a.htm. Summarized in
Addressing the Financing Needs of Small Businesses: Summary of Key Themes from
the Federal Reserve System’s Small Business Meeting Series. July, 14, 2010. www.
federalreserve.gov/events/conferences/2010/sbc/downloads/small_business_
summary.pdf.
9 Author’s notes from Question and Answer session with Chairman Ben Bernanke,
June 3, 2010.
10 Financial Accounting Standards Board. June 12, 2009. FASB Issues Statements 166
and 167 Pertaining to Securitization and Special Purpose Entities. www.fasb.org/cs/
ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNew
sPage&cid=1176156240834.
11 U.S. Department of Commerce, Minority Business Development Agency. January
2010. Disparities in Capital Access between Minority and Non-Minority-Owned
Businesses: The Troubling Reality of Capital Limitations Faced by MBEs. www.mbda.
gov/sites/default/files/DisparitiesinCapitalAccessReport.pdf.
12 www.sba.gov/recovery/arcloanprogram/index.html.

December 2010

ECONOMIC DEVELOPMENT

Addressing the financing needs of small businesses
A Federal Reserve System Series
A Quad Cities conversation on small business capital and development
May 19, 2010 – Davenport, Iowa
In Partnership with:
The Greater Quad Cities Hispanic Chamber of Commerce and
The Latino Connection
Ray Bacon, Vice President, Federal Reserve Bank of Chicago
Patrick Burke, Economic Development Manager, City of Moline
Roberto Cornelio, Chief Operating Officer, Illinois Hispanic Chamber of Commerce
Jen De Kock, Attorney – Moderator
Terry Esch, Executive Vice President, Southeast National Bank
Carmen Fuentes, Owner, Carmen’s Jewelry
Shane Hauman, Owner, Collins Construction Co.
Ann Hutchinson, Regional Director, Eastern Iowa Small Business Development Center
Kimberline Jones, Community Development/Social Responsibility, Wells Fargo Bank
Redmond Jones, Assistant City Administrator, City of Davenport
Richard Lamb, President, First National Bank of Davenport – Moderator
Dennis Larkin, Branch Manager, Small Business Administration
Clyde Mayfield, Owner, Greatest Grains
Mark “Butch” McCreight, Senior Vice President – Commercial Loans, THE National Bank
Vicky Miller, Coordinator, Illlinois Procurement Technical Assistance Center
Helen Mirza, Community Affairs Program Director, Federal Reserve Bank of Chicago
Mark Moylan, Deputy Regional Director/Kansas City, FDIC
Nanci Perkins, President, Latino Connection
Alfred Ramirez, Interim President, The Greater QC Hispanic Chamber of Commerce
Roger Thomas, State Representative, Ranking Member, Iowa Economic Growth Committee
John Wetzel, Service Corp. of Retired Executives (SCORE)
Special thanks to:
Black Hawk College
City of Davenport
City of Silvis
Jen De Kock
First National Bank of Davenport 		

City of Moline 				
Eastern Iowa Community College
THE National Bank

Addressing the financing needs of Indiana’s small businesses
May 20, 2010 – Indianapolis, Indiana
Kyle Anderson, Professor of Business Economics, Kelly School of Business, IUPUI
Ray Bacon, Vice President – Supervision & Regulation, Federal Reserve Bank of Chicago
Desiree Hatcher, Community Affairs Program Director, Federal Reserve Bank of Chicago
Larry Lux, Executive Vice President, Shelby County Bank
John J. Miller, Vice President – Business Services, IU Credit Union
Sharon O’Donoghue, Executive Director, Business Ownership Initiative of Indiana
Stacey Poynter, Lender Relations Specialist, U.S. Small Business Administration – Indiana District Office
Barbara Quandt, Executive Director, National Federation of Independent Businesses

Profitwise News and Views

December 2010

19

SPECIAL THANK YOU
Stacy L. Shew, Executive Director, National Association of Women Business Owners – Indianapolis
Alan Waltz, Vice President and Regional Credit Manager, Indiana Bank & Trust Company
Larry G. White, Business Advisor, Central Indiana Small Business Development Center

Addressing the financing needs of Wisconsin’s small businesses
May 27, 2010 – Milwaukee, Wisconsin
In Partnership with
Community Bankers of Wisconsin
U.S. Small Business Administration
Raymond Bacon, Vice President, Federal Reserve Bank of Chicago
William P. Beckett, President and CEO, Chrysalis Packaging & Assembly Corporation (CHRYSPAC)
Jeremiah Boyle, Managing Director, Economic Development, Federal Reserve Bank of Chicago
Barbara Eckblad, Director of Lending, Wisconsin Women’s Business Initiative Corporation
Curtiss Harris, Executive Director, African-American Chamber of Commerce of Greater Milwaukee
Steven Kuehl, Economic Development Director, Federal Reserve Bank of Chicago
Paul Kuplic, VP Commercial Loan Officer, Community Bank & Trust, Sheboygan, Wisconsin
Daryll Lund, President and CEO, Community Bankers of Wisconsin
Eric Ness, Wisconsin District Director, U.S. Small Business Administration
Tim Peterson, Director, Small Business Development Center, University of Wisconsin-Milwaukee
Bill G. Smith, Wisconsin State Director, National Federation of Independent Businesses
William Testa, Vice President and Economic Advisor, Federal Reserve Bank of Chicago

Addressing the financing needs of Michigan’s small businesses
June 3, 2010 – Detroit, Michigan
Dave Andrea, Senior Vice President, Original Equipment Suppliers Association
Michael Barr, Assistant Secretary for Financial Institutions, U.S. Department of Treasury
Ray Bacon, Vice President, Supervision and Regulation, Federal Reserve Bank of Chicago
Bill Baughman, President & CEO, Plastomer Corporation
Karl Bell, Senior Vice President, Detroit Investment Fund
Ben Bernanke, Chairman, Board of Governors Federal Reserve System
Ron Bloom, Senior Counselor to the President for Manufacturing Policy, U.S. Department of Treasury
Bernie Bowersock, Senior Vice President, North American Tool Corporation
Jeremiah Boyle, Community Affairs Program Director, Federal Reserve Bank of Chicago
Jim Bradbury, President, Grand Rapids Controls Company
Sandra Braunstein, Director, Consumer and Community Affairs, Federal Reserve Board of Governors
Paul Brown, Manager, Capital Markets Development, Michigan Economic Development Corporation
Rick Brown, Chief Financial Officer, Saturn Electronics and Engineering
Mike Dolson, Senior Vice President, Charter One Bank
Charles Evans, President & Chief Executive Officer, Federal Reserve Bank of Chicago
Harry Ford, Manager, Community Affairs, Federal Reserve Bank of Chicago
Giuseppe Gramigna, Chief Economist, U.S. Small Business Administration
Louis Green, President & CEO, Michigan Minority Supplier Development Council
Richmond Hawkins, Vice President, Michigan Commerce Bank

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Profitwise News and Views

December 2010

SPECIAL THANK YOU
Richard King, Regional Director, Michigan Small Business & Technology Development Center
Eastern Michigan University
Curt Lansbery, President & CEO, North American Tool Corporation
Timothy Mangenello, Chairman, Borg Warner, Inc.
Terrence K. McHugh, CEO, Commercial Alliance
Cathy McClelland, President & CEO, McClelland & Associates
Michelle Richards, President and CEO, Center for Empowerment & Economic Development
Wes Smith, President & CEO, E&E Manufacturing
Don Snider, President & CEO, Walden Foods
William Strauss, Senior Economist, Federal Reserve Bank of Chicago
Paul Taylor, Chief Economist, National Automobile Dealers’ Association
Richard Temkin, District Director, U.S. Small Business Administration
Kevin Watters, CEO, Business Banking, JP Morgan Chase
Alicia Williams, Vice President, Federal Reserve Bank of Chicago

Addressing the financing needs of Illinois small businesses
June 11, 2010 – Chicago, Illinois
In Partnership with:
U.S. Small Business Administration
Raymond Bacon, Vice President Supervision and Regulation, Federal Reserve Bank of Chicago
Kathleen C. Bishop, Entrepreneurship Network Coordinator
Illinois Department of Commerce and Economic Opportunity/Small Business Development Centers
Cara Castallano, Chief of Policy, Office of City Treasurer of Chicago
Gloria Castillo, President, Chicago United
Jon S. Maul, Central Region Executive, Business Banking, JP Morgan Chase
Otis Monroe, III, CEO, The Monroe Foundation
Harry Pestine, Community Affairs Program Director, Federal Reserve Bank of Chicago
John Roberson, Executive Vice President, Chicagoland Entrepreneurial Center
Donna Rockin, Director, Illinois SBDC Duman Microenterprise Center
Judith Roussel, District Director, U.S. Small Business Administration
Andy Salk, President and CEO, First Eagle Bank
Debra Schwartz, Director of Program-Related Investments, MacArthur Foundation
Jill Stephens, Vice President of Lending, ACCION Chicago
William Testa, Vice President and Economic Advisor, Federal Reserve Bank of Chicago
Gustave E. Tucker, Vice President – Entrepreneurship, Chicago Urban League
Alicia Williams, Vice President, Federal Reserve Bank of Chicago
Norman J. Williams, CEO, Illinois Service Federal Savings and Loan

Special thanks to:

• ACCION Chicago
• Chicagoland Entrepreneurial Center
• Chicago United
• Chicago Urban League

Profitwise News and Views

December 2010

21

SPECIAL THANK YOU

• Duman Microenterprise Center/Illinois SBDC/Jewish Vocational Services
• IFF
• Illinois Department of Commerce and Economic Opportunity/Small Business Development Centers
• Illinois Women’s Development Center
• John D. and Catherine T. MacArthur Foundation
• Monroe Foundation
• Woodstock Institute
Biography
Jeremiah Boyle is the managing director of Economic Development for the
Federal Reserve Bank of Chicago’s Community Development & Policy Studies
division. Mr. Boyle is the project coordinator for the Housing Opportunity Partnership
for Southeast Wisconsin, and contributing editor of the Federal Reserve Bank of
Chicago’s Profitwise News and Views publication. Mr. Boyle holds a bachelor of arts
degree in political science and a master’s degree in urban and regional planning
from the University of Illinois at Urbana-Champaign, and a master of business
administration degree from North Park University in Chicago.

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Profitwise News and Views

December 2010

ECONOMIC DEVELOPMENT

Small business development in Indiana:
Growing a diversified economy through innovation
by Desiree Hatcher

The SBA’s Office of the Advocacy
released a study by a task force on small
business and innovation, which offered a
fundamental precept:
Innovation is an essential ingredient
for creating jobs, controlling inflation, and
for economic and social growth. Small
businesses make a disproportionately
large contribution to innovation. There is
something fundamental about this
unusual ability of small firms to innovate
that must be preserved for the sake of
healthy economic and social growth.
Innovation derives from imagination
and the will and the need to compete.
However, a business begins first with a
business plan that most often calls for
outside financing; business loans,
particularly in the current environment,
begin with a thorough credit analysis.
Lenders are expected to follow the five
Cs of credit analysis. Capacity to repay;
the amount of money (capital) invested
by the potential borrower; any asset(s)
offered as security (collateral) for the
loan; purpose of the loan (conditions);
and the potential borrower’s business
experience and demonstrated willingness
to repay the loan (character), often
assessed by personal credit history. The
Community Reinvestment Act (CRA)
encourages insured depository
institutions covered by the act to help
meet the credit needs of its entire
community, including low- and moderateincome neighborhoods, consistent with
safe and sound operations, which the

underwriting process is designed to
ensure. The safe and sound component
applies to all lending, including small
business loans. For this reason, banks
prefer to invest in developed companies
that have documented revenues and
expenses. Emerging technologies and
start-up businesses are frequently
viewed as inherently risky.
The state of Indiana is committed to
increasing the number of innovative,
high-tech, high-paying jobs in order to
diversify the state’s economy. Indiana
seeks to encourage existing businesses
to relocate to the state and promote
entrepreneurism and small business
development within its borders.

How is Indiana supporting small
business development?
Indiana provides resources to help
local small businesses and start-ups.
These resources include tax incentives,
grants, matching awards, and credit
enhancements, which can assist hightech start-ups develop to a stage where
they have a level of seasoning that
allows mainstream lenders (banks
principally) to consider lending to them
while satisfying internal or regulator
defined risk guidelines.

supporting the commercial development
of new technologies.
Created by the Indiana General
Assembly in 1999 and brought under
the leadership of the Indiana Economic
Development Corporation (IEDC) in
2005, the Fund provides awards to help
businesses make the transitional leap
from research to product development.
The Fund also serves as a conduit to
venture capital, angel investors, and
other sources of funding by providing
much needed seed capital to promising
entrepreneurial ventures.
The IEDC’s leadership has had a
significant impact on the Fund’s support
of small businesses. For the period
2005 – 2007 (the most recent data
available), 90 percent of the $42.3
million awarded was granted directly to
small companies. In contrast, only 23
percent of total Fund awardees were
small firms in the years prior to the
IEDC’s management.

21st Century Research and Technology Fund

To qualify for a Fund award, a
company must propose a technology
development project that can be
commercialized into an innovative
product or service with plausible
commercial value. In general, projects
considered for direct Fund awards must
(be projected to) cash flow or at least
break even in less than 24 months.

The goal of the Indiana 21st Century
Research and Technology Fund (Fund)
is to foster innovation by directly

Proposals are evaluated on the
thoroughness of the business plan and
technology roadmap, as well as the

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December 2010

23

ECONOMIC DEVELOPMENT
likelihood of success. There is also
emphasis in the evaluation on the
economic impact (generated by the
project) in Indiana; high-wage, high-skill
job creation is an important
consideration. The Fund also
encourages the creation of new
commercial and academic partnerships,
an additional criteria considered in
providing awards.

provide qualified small businesses with
opportunities to propose innovative ideas
that meet the specific research and
development and technological needs of
the federal government. The Fund
matching grants serve to leverage federal
dollars, accelerate the development of
innovative new technologies, and align
state technology development goals with
those of the federal agencies.

Awards do not fund normal business
operations; funds are applied to specific
technological development activities,
including prototype development, clinical
trials, and testing and validation; all of
which reduce the investment risk for
private sector investors.

Since 2003, the Fund has made 325
SBIR and STTR Phase I matching
awards (to 129 companies) totaling
about $35 million. While the Indiana
Phase I to Phase II transition rate prior
to the Phase I matching program was
less than 28 percent, this transition rate
for Indiana is now about 46 percent
(close to the national average transition
rate of 48 percent).

By supporting high-tech companies
during their crucial market entry stage,
the Fund encourages entrepreneurial
success and keeps Indiana’s most
promising technologies in Indiana,
leading to the creation of the high tech,
high-paying jobs and (thereby)
diversifying the state’s economy.
Since 2005, the Fund has made 70
awards totaling $91,454,604 to support
the development and commercialization
of a wide range of emerging and
innovative technologies with marketchanging potential.

Fund SBIR/STTR awards
The primary entry into the Fund for
early-stage technology development
projects is through the federal Small
Business Innovation Research (SBIR)
and/or Small Business Technology
Transfer (STTR) programs.
According to Karl Koehler, PhD, deputy
director, and coordinator of Review and
Outreach, the Fund sets aside 25 percent
of its budget for an SBIR program office,
created to support companies that are
applying for or have received SBIR and/or
STTR awards.
The Fund matches any SBIR/STTR
Phase I awards won by Indiana
companies, up to $75,000. These two
competitive federal three-phase programs
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Profitwise News and Views

Indiana SBIR enhancement programs
The Indiana SBIR/STTR program
provides a range of supportive
services to Indiana’s SBIR/STTR
applicant community. In addition to
Phase I matching awards, the Fund
provides proposal development and
submission assistance, which involves
assigning professional writers to
applicants at the Fund’s expense.
Phase I matching awardees are
provided Foresight Technologies
Niche market assessments at no cost.
The IEDC operates the Indiana
Venture Capital Tax Credit program,
which is frequently utilized by the
Indiana SBIR/STTR community.
Introduction of the proposal
development program increased the
number of Fund Phase I matching
awards from 36 to 37 matches per year
to 51 matches per year.

Venture Capital Investment Tax Credit
Indiana instituted the Venture Capital
Investment Tax Credit program to attract
or retain investment capital by way of
income tax credits. The tax credit
program improves access to capital for
start-up and fast growing Indiana

December 2010

companies by providing individual and
corporate investors an additional
incentive to invest in early stage firms.
Investors who provide qualified
investment capital to qualified Indiana
companies receive a credit against their
Indiana tax liability. The maximum credit
equals the lesser of 20 percent of the
investment or $500,000.
A business is considered a qualified
Indiana business if the IEDC determines
that, among other factors, the business:

• Is primarily focused on professional

motor vehicle racing,
commercialization of research and
development, technology transfers,
or the application of new technology,
or is determined to have significant
potential to bring substantial capital
into Indiana, create jobs, or diversify
the business base of Indiana.

• Had average annual revenues of less
than ($10million, in the two years
preceding.

• Has at least 50 percent of its

employees residing in Indiana, or at
least 75 percent of its assets located
in Indiana.

Since the program’s inception in
2004, the number of investment dollars
pledged to qualified businesses by
investors has increased each year and
now totals more than $28.2 million. The
number of investors utilizing the
program also continues to increase
each year with more than 1,300
individual (angel), venture capital, and
corporate investors in IEDC’s database.

Patent income exemption
Indiana has implemented a tax law
which aims to encourage innovation by
giving entrepreneurs and small
businesses a break on Indiana state
income taxes for income derived from
specific patents. Under Indiana’s patent
income exemption law, qualified
taxpayers (individuals, companies with
500 or fewer employees, and nonprofit
organizations and corporations) receive

ECONOMIC DEVELOPMENT
tax exemptions on certain income
derived from qualified utility and plant
patents, issued after December 2007.
A qualified taxpayer is entitled to an
exemption from taxation for:

Although each park provides their own
unique resources, the majority of the
parks offer incubator space, technical
assistance, general business services,
and assistance in raising capital.

• Licensing fees or other income

How do incubators contribute to
local and regional economies?

• Royalties received for the

A 2008 study by the Economic
Development Administration (EDA)
found that business incubators are an
effective public-private approach that
produces new jobs at the lowest cost to
the government. For every $10,000 in
EDA funds invested in business
incubators, an estimated 47 to 69 local
jobs are generated. In rural areas,
business incubator projects are the
most effective type of EDA project.

received for the use of a qualified
patent;
infringement of a qualified patent;

• Receipts from the sale of a qualified
patent; and

• Subject to specified limitations,

income from the taxpayer’s own use
of the taxpayer’s qualified patent to
produce the claimed invention.

Qualified taxpayers are eligible for an
exemption of 50 percent of patent
income for each of the first five years.
The exemption percentage decreases
over the next five years to 10 percent in
the tenth year. The total amount of
exemptions claimed by a taxpayer may
not exceed $5 million per year.

Certified Technology Parks
In 2002, Indiana unveiled an
innovative statewide economic plan
called Energize Indiana. The plan called
for the investing of more than a billion
dollars in new initiatives designed to
stimulate new and existing businesses.
One of those initiatives was the
Certified Technology Park program.
Under this program, qualifying
communities that wish to establish
themselves as havens for high-tech
research and business could apply for
state assistance to launch Certified
Technology Parks.
Designation as a Certified
Technology Park allows for the local
recapture of certain state and local tax
revenue, which can be invested in the
development of the parks that serve as
incubators to grow and nurture new
ideas and high-tech enterprises.

Further, incubator graduates create
jobs, revitalize neighborhoods, and
commercialize new technologies, thus
strengthening local, regional, and even
national economies. The National
Business Incubation Association (NBIA)
estimates that in 2005 alone (the most
recent information available), North
American incubators assisted more than
27,000 start-ups that provided full-time
employment for more than 100,000
workers and generated annual revenue
of more than $17 billion.
According to a report by the
Battelle Memorial Institute, every job
in a research park generates an
average of 2.57 jobs in the economy.
Business incubators reduce the risk of
small business failures. Historically,
NBIA member incubators have
reported that 87 percent of all firms
that have graduated from their
incubators are still in business, and
that 84 percent of incubator graduates
stay in their communities.
Indiana’s growing network of nine
business incubators and 19 Certified
Technology Parks help encourage the
growth of start-up life sciences and
high-technology companies. The
following is just one example of a
tech-park’s impact:

West Lafayette Purdue Research Park
Purdue Research Park of West
Lafayette (one of Purdue’s four
research parks) is the state’s first
designated certified technology park,
and its business acceleration model
has received state and national
recognition. Designated as a
technology park in 2003, the park is
home to 158 companies, of which 107
are technology-related and focused on
companies operating in the areas of
life sciences, Homeland Security,
engineering, advanced manufacturing,
and information technology.
According to Tim Peoples, director,
Purdue Technology Centers, as of
2009, the park employed more than
3,100 employees. In addition, the
park’s annual average wage for new
companies was $54,000. This
compares favorably to the states
average annual income of $38,901
and the U.S. average of $45,716 for
2008 (the most recent available data).

Indiana Capital Access Program
The Capital Access Program (CAP)
is a small business credit
enhancement program that creates a
specific cash reserve fund for the
lender to use as additional collateral
for loans enrolled in the program. CAP
allows lenders to consider making
slightly riskier loans that might not
meet conventional lending
requirements.
Under the program, the borrower,
the lender, and the IEDC each
contribute a percentage of the loan
into the lender’s reserve fund, which
pools contributions from all CAP loans.
The lender determines whether a loan
is made, the interest rate, the terms
and conditions, and the amount
contributed to the reserve fund (1.5
percent to 3.5 percent of the loan).
The borrower pays its portion and the
lender matches that amount (which the
lender passes on to the borrower). The
IEDC contributes a combined match of

Profitwise News and Views

December 2010

25

ECONOMIC DEVELOPMENT
both the lender and borrower based on
the following calculations:

• One-to-one for lenders with over $2
million in loans enrolled in CAP.

• One and a half for lenders with less
than $2 million in loans enrolled in
CAP.

• Double when a lender makes a loan
to a business that is owned and
operated by a racial minority
borrower.

• Triple when the business is a high-

growth/high-skilled company paying
high wages to skilled workers or is a
licensed child care facility.

Note that the highest match category
includes high-growth/high-skill
companies, again emphasizing the
objective of increasing wages and
diversifying the state’s economy. Matt
Tuohy, program manager, stated that
though available to lenders of all sizes,
small and mid-size community banks are
the biggest users of the CAP program.
This is due to the ease at which the
program can be utilized in making smalldollar loans compared to the amount of
effort and documentation involved in
originating a loan secured by the SBA.
The CAP program does not compete
with SBA programs, but provides an
alternative resource for lenders. Tuohy
estimates that the average loan amount
originated under the CAP program is
$50,000, making them true examples of
“mom and pop” loans.
As of December 2009, the Indiana
CAP has helped Indiana lenders make
over 3,600 loans totaling in excess of
$185 million and assisted in the
creation of over 11,300 jobs. Tuohy
indicated that the CAP program has
been frozen due to state budget cuts.
However, funding may be reinstated in
the 2011 budget cycle.

26

Profitwise News and Views

Conclusion
Small businesses are vital to the
nation’s economy. According to the
Small Business Administration, they
represent 99.7 percent of all employer
firms, employ just over half of all private
sector employees, and pay 44 percent
of total U.S. private payroll. By offering
these grants, tax incentives, and high
tech incubator programs to help start
and grow innovative high-wage
companies, Indiana state officials are
helping small businesses and start-ups
develop the technology, expertise, and
financial maturity needed to diversify
the state’s economy and reach a stage
of development where they are more
attractive to the financial community.

Biography
Desiree Hatcher is a community development director in the Federal Reserve Bank
of Chicago’s Community Development and Policy Studies division. Her current
responsibilities include conducting outreach, providing technical assistance, and
coordinating events which promote community development and fair access to
financial services. Ms. Hatcher earned a bachelor’s degree in finance from the
University of Detroit Mercy and a master’s degree in administration from Central
Michigan University. She also holds certifications as a commissioned examiner,
Certified Financial Services Auditor (CFSA), and Certified Regulatory Compliance
Manager (CRCM).

December 2010

ECONOMIC DEVELOPMENT

Engaging corporate leaders and
promoting economic development in
Milwaukee
by Mary Jo Cannistra
The Federal Reserve Bank of
Chicago, Milwaukee Urban Entrepreneur
Partnership, and the University of
Wisconsin’s Center on Business and
Poverty convened a series of meetings
over the past year to discuss how
corporate and civic leadership can be
engaged to promote economic
development in Milwaukee, Wisconsin.
The meetings focused on forging
greater links between corporations and
small- and minority-owned businesses
in the community, and on employmentbased programs that help provide for
the health and wealth of working
families and help sustain communities.
Progress Through Business is a
national, nonprofit affiliate of the
University of Wisconsin’s Center on
Business and Poverty. It was created to
focus on three key themes for the
growth of communities: BusinessLINC,
EmployeeLINC and GreenLINC. (LINC
stands for Learning, Investment,
Networking, and Collaboration).
BusinessLINC focuses on ways to
engage and support small, scalable,
growth-oriented businesses, located in
or employing people from low- and
moderate-income communities.
BusinessLINC connects small- and
minority-owned businesses to business
development opportunities in the
corporate supply chain. EmployeeLINC
focuses on the long-term financial
stability of employees who work for
these companies. GreenLINC focuses

on the long-term sustainability – both
economic and environmental
sustainability – for those communities.
The theme of the first meeting,
hosted at the law firm of Foley and
Lardner, was “Leveraging Minorityowned Business to Build Corporate
Milwaukee.” James Connelly, partner
at Foley and Lardner, pointed out that
Milwaukee has an incredible array of
government and nonprofit community
resources, but “the biggest gap that
exists in this community is the
partnership between individual
business leaders and individual
minority entrepreneurs.”
Kathryn Dunn, community investment
officer at the Helen Bader Foundation
(Foundation), explained the thinking
behind some of the investments the
Foundation has made in the community.
In the late 1990s, welfare reform
required communities to explore how to
create the jobs necessary to move
people from welfare to work. Some
initiatives focused on workforce training
and job-readiness programs. Others
focused on the need to support
emerging businesses.
The Foundation surveyed the
landscape of distressed or
disenfranchised areas in the greater
Milwaukee area and found that a few
banks were lending but not meeting
demand. The Foundation decided to
emphasize increasing access to capital

for minority- and women-owned
businesses, and supporting technical
assistance and entrepreneurship
programs offered in colleges,
universities, or community-based
organizations that had an established
platform, including curriculum and
mentoring opportunities.
The Foundation decided to launch a
Program Related Investment (PRI)1
fund to invest directly in for-profit
ventures to support the growth and
development of minority-owned
businesses in the city. The Fund’s goal
was not to replace traditional
financing, but rather to get borrowers
to a strong enough position for
traditional financial institutions. The
Foundation, doing “one-on-one deals,”
Dunn said, ran the risk that it “would
just become another bank.” The
Foundation decided to create a private
equity fund that would bring traditional
investors to a marketplace where they
may not have been.
One of the challenges the community
faces is connecting resources, whether
it’s a direct purchasing relationship
between a minority company and a large
corporation, or a financing situation. “We
need to get more people introduced to
these opportunities,” Dunn said. It is
important to make certain that
entrepreneurs have access to the credit
and capital they need. Businesses also
need the technical expertise to better
understand their market niche so that

Profitwise News and Views

December 2010

27

ECONOMIC DEVELOPMENT
they can continue to grow. That kind of
technical assistance is often missing,
Dunn observed.
The Foundation was an early investor
in Generation Growth Capital (GGC).
John Reinke, director at GGC, said that
his company is mainly focused on being a
double bottom line private equity fund in
a segment of the market that has been
traditionally underserved. Reinke
indicated that “There’s not a lot of private
equity capital chasing smaller middle
market companies.” He defines that as
companies under $50 million in sales,
although GGC generally targets
companies in the $5 million to $25
million in sales range. He pointed out that
nationally, there are not a lot of people
doing that. On a regional level, there is
virtually no one focused on the state of
Wisconsin, and only a few funds have
come in from Minneapolis and Chicago.
GGC’s next area of focus includes
companies that have a positive impact
and are located in low- to moderateincome areas, and companies that are
led by minority entrepreneurs. Reinke
describes this as a novel idea in this
state and GGC as “having the
playground to ourselves.” Reinke pointed
out that, “You can make market-rate,
private equity returns investing in this
space. As you generate those returns,”
he continued, “the market becomes
efficient and more of the deeply needed
risk capital flows into these sectors of
our economy that have been neglected.
These businesses and entrepreneurs
don’t just need capital, they also need
many resources. GGC also recognizes
that the fund has a unique opportunity
to bring in other business and operating
advisors that leverage resources across
an entire portfolio of companies.
Another company that combines
technical assistance and financial
support for small businesses is
Wisconsin Business Development
Corporation (WBD). Carol Maria,
president of WBD Service Company,
explained the credit issues that many of
the businesses in the community face.
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Profitwise News and Views

WBD is a specialized, licensed
organization under the Small Business
Administration (SBA). They are the
twelfth largest certified development
company in the nation, and since its
inception, WBD has produced nearly
17,000 loans to small businesses. All
borrowers must occupy the real estate
used to secure the loan. Every deal
WBD structures with an SBA 504
program client is generally a “50/40/10”
type of loan. A traditional bank lends 50
percent of the project cost, the SBA
lends 40 percent, and the borrower
invests 10 percent.
In 2009, WBD did more outreach in
different spheres of influence to find
transactions and doubled its network of
lenders that had not historically used
the SBA 504. WBD’s leaders require
that WBD finds additional credit
enhancements to support their small
business lending activities. Maria’s role
at WBD is to transition the organization
from a transactional culture to a
community development finance model.
The New Markets Tax Credit (NMTC)
has been a particularly useful tool in
this regard.
The typical structure of a WBD deal
is one where an investor in the NMTCs,
a bank, is also the lender. The bank
lends 70 percent of the total project
cost in commercial credit. The bank
funds the remaining 30 percent of the
project cost through the NMTCs it buys
from WBD. The structure allows WBD to
evolve a deal that is initially 100 percent
financed to a 70 percent loan-to-value
deal (before any appreciation in the
underlying security) at the end of seven
years when the credits expire. Maria
stressed that the creation of equity that
quickly in a business is a crucial aspect,
because the SBA 504 product is longterm at a fixed rate.
“When an investment is made in the
504 deal structure, all of the businesses
show an increase in payroll over the
term of their loan,” Maria said. “So we
know,” she continued, “that the SBA tool
works to increase wealth in communities

December 2010

by increasing payroll to people who
work there.” WBD expects that same
trend, but at a much larger scale, with
the NMTCs. They anticipate that within
the next seven years, they will have the
first loan fund at WBD which can
provide additional subsidy to other 504
projects or other kinds of projects.
In addition to being a partner at Foley
and Lardner, James Connelly is also a
venture capitalist. In the summer of
2006, Connelly invested in a minorityowned company called Trinidad Group,
owned by Frank Cumberbatch. With
Connelly filling the role of mentorinvestor, Trinidad Group has undertaken
two ambitious endeavors. The first is
Boca Grande Capital, a Milwaukeebased real estate development firm that
is focused on the revitalization of
downtown Ripon, Wisconsin. Boca
Grande has acquired more than 20
buildings on the main street in Ripon.
Ripon’s downtown is “still intact,” and
most of the buildings were built between
1829 and 1881. Boca Grande has
formed a public-private partnership with
the city of Ripon and the city
government established a
redevelopment zone covering the entire
downtown area.
Connelly and Cumberbatch’s second
endeavor is Granite Broadband.
Wireless broadband capacity is mostly
nonexistent in small towns and rural
areas – particularly in Wisconsin. The
corporate headquarters for Granite
Broadband will soon be located in one
of the newly renovated buildings in
Ripon, Wisconsin. Connelly indicated
that, in cooperation with the Wisconsin
Department of Commerce, Granite
Broadband is well positioned to receive
federal funding to develop broadband in
the northern half of Wisconsin.
Connelly stated that the most
important aspects of an investorentrepreneur relationship are: trust,
absolute open communication, and
ongoing accountability – on both sides.
He went on to say that “Balance sheets,
operating statements, budgets, cash flow,

ECONOMIC DEVELOPMENT
margins, all of those types of
fundamentals are essential to the success
of any entrepreneur.” In business, Connelly
refers to what he calls his “rule of three,”
which is “If you have more than three
priorities, you have none.”
Further discussion among the
meeting participants involved business
partner relationships. One participant
pointed out that “we cannot have
business ownership on one side of the
race equation and no real ownership on
the other side.” Developing trusting
relationships between White leaders
and emerging minority entrepreneurs is
critical. These relationships will only
succeed if there is ethical, corporate
community, and financing behind the
whole process.
Leo Ries, Milwaukee program
director for the Local Initiatives Support
Corporation, highlighted Marquette
University’s Associates in Commercial
Real Estate (ACRE) program as a great
model that could be replicated in other
industries. The program attracts young
entrepreneurs who have an interest in
commercial real estate. Over time, a
relationship is built that provides ways to
create networking opportunities and
expand into a much bigger enterprise.

support this relationship building
process between people, resources, and
expertise, and the struggling
entrepreneur who in some cases is
unaware of the opportunities and
resources available in the community.”
Don Graves, (then) chairman of the
Milwaukee UEP (and now a deputy
assistant secretary with the Treasury
Department), reiterated the importance
of being able to create these types of
relationships between the corporate
executives and the leaders in the
community – those in which they
actually want to spend the time with
emerging business leaders.

that make a difference.” He added that
by creating an organization that’s
learning, caring, and ethical, you create
an organization wherein everyone feels
like they make a difference.
Competitively, if everyone feels that they
make a difference, you will make a
difference as a company.

Curt Culver, CEO at Mortgage
Guaranty Insurance Corporation (MGIC),
expressed the importance of

Another point Culver made is that
fairness, honesty, respect, integrity, and
finding fulfillment and balance are as
important in your business life as they
are in your personal life. He
recommends getting involved in the
community to his employees as one way
of achieving balance and fulfillment.

Culver stressed that “You want your
people to feel like they’re always
leaders. You want them to always take
ownership and you want them to find
fulfillment in their job . . . if they find
fulfillment in their job, they find it in their
lives.” He believes that it’s not about
titles – it’s about people who put their
Graves also emphasized the need for talent into action, and that if people feel
a continuum of services and support for their life has a purpose, they’ll live that
entrepreneurs in the Milwaukee
type of life. Culver, who grew up with
community – from someone interested
parents running a family-owned
in starting a small business to the owner business, works hard to create
of a growing, scalable business. “What
opportunities for people in his company.
can be done to ensure that there is this MGIC surveys its employees each year
continuum of services and support, so
on how MGIC is doing as a company,
that people can succeed in starting a
and how happy they are with their jobs.
business, growing the business,
“Companies need to create an
employing people in the community, and atmosphere in which everyone feels like
creating economic wealth?”
they can do the right thing,” he added.

“...the most important aspects of an investorentrepreneur relationship are: trust, absolute open
communication, and ongoing accountability – on both
sides...“Balance sheets, operating statements, budgets,
cash flow, margins, all of those types of fundamentals are
essential to the success of any entrepreneur.”
Similarly, Ries explained, the Main Street
Program reaches out to “segregated,
homogenous minority neighborhoods
that have no interaction with the broader
culture to help them become functional
sub-communities within their own
environment. It’s important to find a way
to create structures that enable and

A subsequent meeting convened by
Progress Through Business, Milwaukee
Urban Entrepreneur Partnership, and
the Federal Reserve Bank of Chicago at
Milwaukee’s Urban Ecology Center, 2
picked up on Culver’s theme of
corporate engagement in the community
through its employees. This theme also
corporations’ employee culture as a
contributor to community and economic parallels what Progress Through
development in a keynote address to the Business emphasizes under the title of
EmployeeLINC.
meeting. Culver stated that “The only
sustainable advantage that any
Drew von Glahn, CEO of FEI
company can have is its employee
Behavioral Health (FEI), established the
culture, because ultimately everything
organization 30 years ago as an
gets commoditized, and it’s your people employee assistance program. FEI
Profitwise News and Views

December 2010

29

ECONOMIC DEVELOPMENT
provides all types of behavioral support
to employees around the country and
the globe. Mental health has a higher
negative impact in the workplace than
any other disease or illness in terms of
productivity losses. He emphasized that
the mental health issues that managers
deal with in the workplace are primarily
family-related issues.
FEI provides services, such as shortterm counseling, financial counseling,
legal advice, and wellness programs,
aimed towards behavior, so that
employees can become more
productive. Their goal is to provide the
employees with the same types of

targeted towards its low-wage
employees. This includes providing a
range of services, from budget coaching
to assisting low-wage employees obtain
Earned Income Tax Credits.

outcomes for workers and their families.
Ways to Work clients are shown to have
improved workforce outcomes, greater
access to mainstream financial services,
and improved family life.

In addition, FEI is in the process of
developing a corporate program that
will allow low-income working parents
to access up to $6,000 in car
financing. Some low-wage workers
experience limited access to credit
because of poor credit or no credit
history. The program has an impact on
the individual’s ability to work and their
retention in the workplace, as well as

Ray Schmidt, executive director of
Select Milwaukee, reported on the costs
and benefits of employer assisted
housing (EAH) programs in Milwaukee.
“In 2009, Milwaukee-area employers
invested $246,000 to help 85
employees purchase homes. That
private investment leveraged another
$294,000 in additional incentives,
leading to $11 million in home sales.”5 In
2004, Schmidt reported that,
“Employers offering EAH home
ownership benefits describe a valuesbased motivation for launching and
maintaining their programs . . . because
management intuitively understood the
value of home ownership and its impact
on employees’ lives, the quality of life in
neighborhoods, the property tax base,
and employee retention and relations.”6
A more recent study was able to
quantify more about Milwaukee
employer assisted housing programs
between 2003 and 2008 (see table on
page 32).7 As Schmidt summarized for
the meeting participants, between 2003
and 2008, employers invested $1.4
million helping 477 home buyers; 62
percent of their investment was direct
investment in the home purchase
($1,835/participating employee, on
average) and the other 38 percent
provided program support and
administration ($1,100/participating
employee, on average). From the
community’s standpoint, that $1.4
million leveraged $55 million in private,
prime-rate mortgage investments – $39
for every $1 of employer contribution.

“The only sustainable advantage that any
company can have is its employee culture,
because ultimately everything gets
commoditized, and it’s your people that
make a difference.”
assistance that nonprofits bring to their
communities. Von Glahn disscussed the
three most frequent challenges:

• marital/interpersonal relationships;
• financial worries; and
• stress.
FEI’s programs help people get their
personal matters in order, so that they
can in turn provide value to their
employer. In order to measure the effect
of behavioral issues in the workplace,
FEI has been analyzing its services on
employees in the workplace. They have
found that when someone goes through
their short-term counseling programs,
there’s about a 90 percent improvement
in terms of days lost in the workplace,
about 25 percent improvement in
productivity, and about 10 percent less
need for using health care services.
FEI has also been working with the
Ford Foundation on a financial
management program specifically
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Profitwise News and Views

their own productivity and sense of
value to the organization.
Jeff Faulkner, president of Ways to
Work, introduced the work that it does
as a community development financial
institution. 3 Ways to Work and FEI
Behavioral Health are part of Families
International, headquartered in
Milwaukee, which also include the
Alliance for Children and Families and
the United Neighborhood Centers. Ways
to Work operates a family economic
success program that links just-in-time
education with loans – a small-dollar
loan product. Typically, it’s a low-interest
car loan for working families to help
them succeed both in the work place
and in their family responsibilities.
Ways to Work has commissioned
several independent studies of the
impact of the Ways to Work program.4
The studies indicated that the
combination of financial counseling,
support, and access to credit improve

December 2010

Schmidt also highlighted the
performance of the EAH clients during
the mortgage crisis. Many of the
clients, without the Select Milwaukee
program, would probably have been
“victimized” as nonprime borrowers.
However, through 2007, the foreclosure
rate on EAH mortgages was only 1.2

ECONOMIC DEVELOPMENT
percent (six of the 477 EAH
participants), as compared to 11.2
percent foreclosure rate in Milwaukee
County in the same period.
Finally, Mr. Schmidt agreed with the
study’s conclusion that correlation is not
causation. “It is important to note that
this study was a one-time snapshot that
was unable to directly test what has
caused the differences in tenure and
performance between employees who
take advantage of EAH and those that
do not.” But the results are “substantial
enough that they are highly suggestive
of a positive bottom line impact of EAH
for Aurora that far exceeds the costs of
its investment in the program.”8
Dr. John Hoffmire, director of the
University of Wisconsin’s Center on
Business and Poverty, David Mancl from
the Wisconsin Department of Financial
Institutions, and Ammar Askari from M&I
Bank all presented examples of
workplace financial education programs
that benefit employees. These programs
have increase income through greater
access to earned income tax credits,
and they have improved employee
participation in employer provided tuition
programs for continuing education and
in employee stock purchase programs.
Each of these programs has
demonstrated retention benefits for
employers as well.
David Weiss, CEO of General Capital
Management, Inc., discussed the
frequently overlooked opportunities for
corporations to invest in community
programs. He emphasized that
programs like Affordable Housing Tax
Credits and New Markets Tax Credits
provide double digit rates of return in
highly regulated, structured investments.
Because these programs have been
dominated by investors motivated by
Community Reinvestment Act
requirements, many businesses
mistakenly believe that these are
philanthropic programs. As an
alternative investment, Weiss points out,
“tax credits have superior risk-adjusted

returns and substantial, measurable
community impact.” As the biggest
historical driver of affordable housing in
America, Weiss said, “It is critical to
expand the universe of buyers for the
tax credits.”

the participants in the Engaging
Corporate Leaders meetings have
argued, companies can even expect a
return on their investments while
supporting the health and vitality of
their own communities.

Similarly, the New Markets Tax Credit
provides a business-oriented
opportunity for investors. Weiss
described the use of New Markets Tax
Credits to help an environmental
cleanup project that resulted in “$50
million in value creation.”
Stan Friedman, president and
cofounder of Retro Tax, a company that
identifies and administers federal wagebased tax credits, which are available
for businesses that are located inside
federal state and county zones, such as
Empowerment Zones, Enterprise
Communities, and Tax Increment
Finance Districts. Friedman is also the
chairman of the International Franchise
Association’s Minorities in Franchising,
bringing financing opportunities to inner
cities – franchising as a business model
and a way to break dependency on a
paycheck and with the promise of
business ownership.

Conclusion
Milwaukee, like many cities, is always
looking for new ways to leverage the
resources of public, private, and
nonprofit entities to improve the
communities and the lives of those
communities’ residents. Corporate
engagement on a business level – as
distinguished from corporations’
philanthropic engagement – is an
emerging but underdeveloped
opportunity according to city business,
civic and government leaders.
Corporations that can work through
their business operations to provide
additional support and benefits to
employees, and provide greater access
to business opportunities for small
businesses can provide a greater level
of support at little or no additional cost
to the company. Indeed, as some of

Acknowledgement
I would like to thank Don Graves
(formerly chairman of the Milwaukee
Urban Entrepreneur Partnership, now
serving as deputy assistant secretary
at the U.S. Treasury Department),
John Hoffmire (director of Center on
Business and Poverty at the
University of Wisconsin) for their
contributions in these meetings, as
well as Jeremiah Boyle (managing
director of Economic Development at
the Federal Reserve Bank of Chicago)
for his assistance with this article.

Biography
Mary Jo Cannistra is assistant
manager in the Community
Development and Policy Studies
(CDPS) division at the Federal
Reserve Bank of Chicago, responsible
for production and project
management in the division. and is the
assistant editor and production
manager for Profitwise News and
Views. Ms. Cannistra holds a BA in
business management from DePaul
University.

Profitwise News and Views

December 2010

31

ECONOMIC DEVELOPMENT
Notes

Table
All Aurora
Employees

Metro Area
Employees

EAH
Participants

Workforce Profile
Number of Employees

26,051

10,007

208

Percent Minority

12%

19%

46.7%

Percent Female

83%

83%

84.6%

Percent Under 35

32%

35%

55.3%

46%

43%

47.6%

48.3%

52.8%

48.6%

5.7%

4.2%

3.8%

Job Level
Staff
Professional
Leadership

Age
20-24

9%

10%

7.2%

25-34

23%

25%

48.1%

35-44

23%

21%

24.5%

45-54

27%

26%

16.3%

55 and up

18%

17%

3.8%

Race
African-American

6%

12%

27.9%

American Indian/
Alaskan Native

1%

1%

0.5%

Asian/Pacific Islander

2%

2%

0%

Hispanic

3%

4%

18.3%

88%

81%

53.4%

White

Turnover
2004

N/A

13.4%

7.2%

2005

N/A

11%

5.3%

2006

N/A

12.1%

3.9%

2007

11.8%

12.6%

4.8%

Source: Lynn M. Ross. 2008.
Quantifying the Value Proposition of Employer-Assisted Housing:
A Case Study of Aurora Health Care.
Center for Housing Policy
www.nhc.org/media/documents/Quantifying_EAH.pdf.

1 “To be program related, the investments
must significantly further the foundation’s
exempt activities. They must be
investments that would not have been
made except for the relationship to the
exempt purposes. The investments include
those made in functionally related activities
that are carried on within a larger
combination of similar activities related to
the exempt purposes.” Retrieved from
www.irs.gov/charities/foundations/
article/0,,id=137793,00.html.
2 The Urban Ecology Center was highlighted
in the October 2009 edition of Profitwise
News and Views, pp.16-17 at www.
chicagofed.org/digital_assets/publications/
profitwise_news_and_views/2009/PNV_
Oct2009_SpEd_web.pdf.
3 Ways to Work was featured in Profitwise
News and Views in May 2007. Available at
www.waystowork.com/documents/
Fed%20Reserve%20Article%20%20
May%202007.pdf.
4 These studies can be found at the Ways to
Work Web site at www.waystowork.com/
pages/p_po_wtw-stds.html.
5 “Select Milwaukee” highlighted at
Minneapolis workforce housing forum
highlights innovative housing solutions at
www.metroplanning.org/news-events/
article/5926.
6 Schmidt, Raymond. 2004. “Significant
Returns on Milwaukee’s Employer Assisted
Homeownership Investments,” in Private
Sector Partnerships: Investing in Housing
and Neighborhood Revitalization.
Washington, DC: National Housing
Council’s Affordable Housing Policy
Review, volume 3, issue 2. June 2004.
Available at www.nhc.org/media/
documents/PrivateSectorFinal04.pdf.
7 Ross, Lynn M. 2008. Quantifying the Value
Proposition of Employer-Assisted Housing:
A Case Study of Aurora Health Care.
Washington, DC: Center for Housing
Policy, May 2008. Available at www.nhc.
org/media/documents/Quantifying_EAH.
pdf.
8 Ross, 2008. pp.9.

32

Profitwise News and Views

December 2010

AROUND THE DISTRICT

Around the district
Illinois
Opportunity Chicago establishes workforce
initiative for public housing residents
The Chicago Housing Authority
(CHA), The Partnership for New
Communities (PNC) and the Chicago
Department of Family and Support
Services (DFSS) recently released a
report, A Partnership for Change, to
provide details about the goals,
strategies, and effects of Opportunity
Chicago, a five-year initiative that began
in 2006 to provide Chicago public
housing residents employment training
and opportunities. Despite the most
challenging economic climate since the
Great Depression, this workforce
development initiative has helped nearly
5,800 Chicagoans obtain employment.
“Not only do initiatives like this advance
good public policy and practices, they
also promote family and community
stability through employment,” said
Lewis A. Jordan, CEO of CHA.
Initial findings from a revitalization
effort that includes the replacement of
impoverished high-rises with mixedincome communities, the Plan for
Transformation, sparked the concept to
establish Opportunity Chicago. After the
first mixed-income sites became ready
for occupancy, officials found a need to
increase access to training and
employment opportunities to help public
housing residents comply with

standards in new mixed-income housing
– many of which require employment as
criteria for residency. “This initiative
focused on Chicagoans who are often
overlooked by the public workforce
development system,” said Maria Hibbs,
executive director of PNC. She
continued, “Through intensive
collaboration, the use of flexible
resources, and dedicated partnership,
Opportunity Chicago met the training
needs of public housing residents while
making significant changes to systems
that serve them.”
The result is a public workforce
development system that is more
responsive to a range of disadvantaged
job seekers and can serve as an example
for other cities across the nation. “Our
goal was to break the cycle of poverty for
families living in public housing,” said
Mary Ellen Caron, commissioner of the
DFSS. “This was an opportunity for all
three partners to help create sustainable,
successful job training and placement
programs as well as demonstrate the
effectiveness of Chicago’s workforce
development system.”
This report is the first of several
documents to be released as
Opportunity Chicago comes to a close
in 2010. A Partnership for Change can
be found at www.opportunitychicago.
org/pages/story/documents/OC_
partnership_for_change.pdf.

Indiana
Combating homelessness in Indianapolis
The Federal Reserve Bank of
Chicago’s Community Development and
Policy Studies division recently hosted
the Indianapolis Community
Development Forum. The guest speaker,
Laura Littlepage, a clinical lecturer from
Indiana University School of Public and
Environmental Affairs, introduced her
report titled, “Focusing on Rapid
Re-Housing Combats Family
Homelessness in Indianapolis” to
highlight how the Coalition for
Homelessness Intervention and
Prevention (CHIP) was coordinated on
January 21, 2010, and how they
administered the annual point-in-time
count of homeless individuals.
Ms. Littlepage discusses in her
article the “details and background of
the count as well as findings and
thoughts for policymakers concerned
with improving services for the
Indianapolis community’s homeless
population.” In her findings, she
concluded that 1,488 individuals were
experiencing homelessness in Marion
County on the date the count began.
According to the 825 responses to the
survey question, the 2 percent
increase over 2009 results is the
result of homelessness, followed by
alcohol and drugs.

Profitwise News and Views

December 2010

33

AROUND THE DISTRICT
Recommendations to improve
services for the homeless population
include: increasing the number of
affordable housing units and the
occupancy rates for those units, as
recommended in the “Blueprint to End
Homelessness,” increasing services for
youth who are aging out of foster care,
providing job training and job placement
assistance, and expanding access to
services that address chronic substance
abusing and mental illness.
For more information, you may
access the full report at www.
policyinstitute.iu.edu/PubsPDFs/
Homeless_PPI_Pr4.pdf.

Iowa
U.S. Small Business Administration
collaborates on promoting Iowa exports
Although widely recognized as a rural
agricultural state, Iowa’s manufacturing
sector now exceeds agriculture in total
economic output. In addition, the Iowa
Department of Economic Development
has a section offering assistance to Iowa
companies that wish to take advantage
of export opportunities. Under the title of
International Financial Assistance, Iowa
has an Export Trade Assistance program
that helps Iowa businesses enter new
markets outside of the United States.
The Small Business Administration
(SBA) has also recently entered into a
renewed initiative to assist U.S. small
businesses to enter or expand their
existing export markets. While Iowa grain
producers have long exported significant
amounts of farm produce to overseas
markets, the other Iowa economic
sectors have recently begun to show
interest in export markets. Through a
combination of assistance from the SBA,
the Iowa Department of Economic
Development, and the U.S. Department
of Commerce’s Commercial Service
division, specializing in international trade,
Iowa small businesses now have several
resources to choose from for assistance
in entering these new trade markets.

34

Profitwise News and Views

Wisconsin
Forward Community Investments recognized
by CDFI Fund and Peers

For more information about the
NEXT Awards, visit www.nextawards.
org/celebration/10awardees.asp.

On November 3, at the Opportunity
Finance Network Conference in San
Francisco, California, Madison-based
Forward Community Investments (FCI)
received a NEXT Award for
Opportunity Finance. The NEXT Award
recognizes CDFIs that demonstrate
“excellence in advocacy, community
impact, financing, and innovation. FCI
was recognized for its 2009 effort to
preserve the tax-exempt status of
housing provided by nonprofit
organizations in Wisconsin, and for its
2010 effort to establish an investment
tax credit for investments in
Wisconsin’s CDFIs.

Michigan
Detroit Works Project: a blueprint for our
future city

The NEXT Award followed close on
the October announcement of the CDFI
Fund’s first Capital Magnet Fund
Awards. Forward Community
Investments was one of only 23
recipients nationally in the first round of
funding. The Capital Magnet Fund
provides grants that CDFIs and
nonprofit housing groups can leverage
for eligible projects at “at least” a 10:1
ratio. Eligible projects include affordable
housing, economic development, and
community service facilities.

According to the presenters, the
Detroit Works project is an opportunity
for our community to come together and
build a roadmap from the Detroit of
today to our future, a better city. The
Detroit Works project consists of four
phases of neighborhood forums and
meetings with community groups. Phase
one was completed in October 2010
and consisted of five community forums
promoting planning awareness. Phase
two began in November 2010 and will
consist of 40 community forums to
obtain public input and ideas on helping
Detroit move forward. Phase three will
consist of six forums with the purpose
of choosing a strategic direction. Phase
four will involve public review and
comment regarding the plan adoption.

The Federal Reserve Bank of
Chicago and the Helen Bader
Foundation hosted a workshop for
Wisconsin CDFIs on December 1 –
the first ever convening of all of
Wisconsin’s CDFIs. That workshop will
be the subject of a forthcoming article
in Profitwise News and Views.
For more information about Forward
Community Investments, visit www.
forwardci.org.
For more information about the
CDFIs Capital Magnet Fund, see www.
cdfifund.gov/news_events/CDFI-201043-Treasury-Officials-CongresswomanLee-Announce-80-Million.asp.

December 2010

The Federal Reserve Bank of
Chicago co-sponsored a conference
with Community Development
Advocates of Detroit, Local Initiatives
Support Corporation, and Financial
Institutions Community Development
entitled, “Signs of Progress in Detroit.”
One of the topics discussed was an
update on the Detroit Works Project
presented by representatives of the
city of Detroit Planning and
Development Department.

According to the presenters, the
mayor is committed to an inclusive,
transparent, and comprehensive process.
The city is facing challenges that cannot
be solved overnight and it is necessary to
provide residents and stakeholders the
opportunity to participate.

CALENDAR OF EVENTS
Call for papers: 2011 Community Affairs Research Conference
Arlington, VA – April 28-29, 2011
The Community Affairs Officers of the Federal Reserve System invite
paper submissions for the seventh annual Federal Reserve Community
Affairs Research Conference. The goal of the conference is to highlight new
research that can directly inform community development policy and practice
in the wake of the deepest recession since the pre-War period. Visit www.
frbsf.org/community/2011ResearchConference for more information on
submission guidelines.

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