insights (2007-38)


Efforts to revive the cityâ’s faltering minority-business loan program funded by a federal Empowerment Zone grant have been proceeding slowly. But another lender has moved aggressively to fill the gap, raising questions about the extent to which the Empowerment Zone loan program is really needed.

Fostering small businesses that would bring jobs and economic vitality to lower-income sections of the city has been one of the cornerstones of the Empowerment Zone program since its inception in 1999. Some $4 million in federal EZ funds were allocated for such small-business loans by the entity selected to govern the program, the Partnership for Neighborhood Improvement. But high default rates on an initial $1 million in loans made under PNIâ’s aegis led to a near cessation of lending activity and then to city assumption of responsibility for the program.

Early this year, the city contracted with the Knoxville Area Urban League to administer the program, and new standards for evaluating and mentoring prospective borrowers were established. The Urban Leagueâ’s Sherman Jones, who is a Harvard M.B.A. with many years of business experience, seemed well suited to the task. Yet after the six months heâ’s been at the helm, only three loans totaling $100,000 have been made.

Jones acknowledges that â“weâ’re getting off to a slow start.â” But he stresses that, â“Itâ’s taken time to set policies and procedures and to educate everyone what to expect.â” Evaluation of the business plans that are required of prospective borrowers can also be time-consuming. â“Our goal is to have a minimum of 10 loans by next January,â” Jones says. But while heâ’s talking to â“10 or soâ” prospective borrowers, no loan applications have yet been received from any of them.

In the meantime, a similar loan program backed by the federal Small Business Administration purports to have made 127 loans totaling $1.6 million in the Knoxville area since 2005. Eligibility for the SBA loan program, known as Community Express, is limited to small businesses owned by minorities, women and veterans. Community Express loans are actually made by SBA-licensed lenders of which by far the largest in the Knoxville area is Superior Financial Group, based in Walnut Creek, Cal.

Knox Countyâ’s supplier diversity coordinator, Robert Minter, has hosted several Community Express workshops at which a Superior Financial representative, Sue Malone, has held forth. Minter says attendance at these workshops has averaged about 150, whereas only 15 people showed up for a public forum on the EZ loan program.

According to Malone, approval for a Community Express loan of up to $25,000 can be quick and easy. Superior Financial doesnâ’t require a business plan or even financial statements from prospective borrowers. â“All we really look at is their credit reports, and if they have good credit histories, they can get a loan within 48 hours,â” Malone relates. Technically, review of a business plan is required by SBA, and the Tennessee Small Business Development Center typically does so. But Malone makes it sound like those reviews are perfunctory at best.

Given the ease with which this credit is extended and given the fact that SBA guarantees repayment of 85 percent of the loans, one might suppose the program would experience high default rates. But Malone insists that such is not the case. â“We understand credit very well, and I work with the businesses Iâ’ve helped fund,â” she says, reckoning that sheâ’s visited Knoxville two dozen times over the past three years and also looks to TSBDC and an organization known as SCORE to provide technical assistance to borrowers.

Surprisingly, neither Jones nor the city official who oversees the EZ program, Madeline Rogero, is even aware of the Community Express program. PNI retains a residual role in EZ governance, and its chairman, senior Sun Trust banker King Purnell, is perplexed both by magnitudes of Community Express lending and the lack of same from the EZ fund. Of the latter, he says, â“Itâ’s hard to believe that with all of the attention being given to this particular fund that that there hasnâ’t been any more success and results. Frankly, I donâ’t get it.â”

Both Jones and Rogero talk in terms of stepped-up marketing efforts to build awareness of the program. Public-service announcements on radio and TV, appearances on talk radio and calls on banks to seek referrals are on the list. (Borrowers arenâ’t eligible for an EZ loan unless theyâ’ve been turned down by a bank.)

â“Iâ’m just not concerned yet. Iâ’ll look at it at year end and see where we are then,â” says Rogero, who is the cityâ’s director of community development.

Unless a lot of progress is made, however, it may also be time to start looking at alternative uses of much of the $3 million presently sitting in the loan fund. Under the terms of the multi-faceted EZ program, any federal funds not committed by the end of 2009 will be forfeited. And as Rogero well knows, there are many other worthy purposes for which the money could be spent. â" Joe Sullivan


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