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The way O. David Dickson had it figured, his five-vehicle
ambulance company needed a new headquarters station in Warrenton,
Oregon, if he was going to cover his corner of the state properly.
So when the right facility hit the market in late 1996, Dickson
jumped at the opportunity to buy it. Not only did the available
facility offer space for a sixth ambulance and crew, but it also
had ample room for a dispatch center and training facility.
There was just one hitch: money. The price of the facility was
$200,000, and when Dickson put everything he had on the line, his
bank would only lend him $140,000. “If I couldn’t get the
other $60,000, I’d lose the deal,” Dickson, 53, recalls.
“There were two other buyers behind me.”
Dickson got his windfall from a little-known lending source, the
Capital Access Program (CAP), now operating in 20 states. By taking
advantage of Oregon’s CAP, Dickson was able to coax another
$60,000 out of the Bank of Astoria and, with his war chest
assembled, completed the deal. Today, Medix Ambulance Service
Inc.’s six ambulances operate round-the-clock to cover
emergencies in Clatsop County.
David R. Evanson’s newest book about raising capital is
called Where to Go When the Bank Says No: Alternatives for
Financing Your Business(Bloomberg Press). Call (800) 233-4830
for ordering information. Art Beroff, a principal of Beroff
Associates in Howard Beach, New York, helps companies raise capital
and go public.
Nothing To It
The Capital Access Program got its start in Michigan in 1986,
according to Dave Dahlin, senior finance officer with the Oregon
Economic Development Department. Oregon’s program was initiated
in 1991, he says, and, since that time, has created or saved about
2,000 jobs. Since it began, Oregon’s CAP has been the catalyst
for about $53 million in loans–loans to small businesses, says
Dahlin, that may never have been made without the program.
Here’s how the program works: When making a CAP loan, the
bank and borrower each pay an upfront fee of between 1.5 and 3
percent of the loan–for a total of 3 to 6 percent. This fee is
similar to an insurance premium. The exact percentage is set at the
discretion of the bank, and in practice, the bank passes its
portion of the fee on to the borrower by financing it with loan
The lending bank deposits CAP premiums into a reserve account it
holds. The state then deposits matching funds into the bank’s
CAP reserve account. This way, the bank creates a loss reserve
that’s equivalent to 6 to 12 percent of total CAP loans.
When compared to overall loan-loss experiences with CAP loans,
these loss-reserve percentages are compelling and indicate why the
program works. For instance, according to Dahlin, with the $53
million in loans made under the CAP program in Oregon, the lenders
experienced a loss rate of 6.6 percent, or about $3.5 million
dollars. But because of the loan reserves of between 6 and 12
percent of the total money lended, the banks were able to fully
recover their losses.
So what’s the overall result of protecting lenders against
losses in this fashion? More small-business loans, says Dahlin.
“The program has made a large number of loans available that
would not be available otherwise,” he says.
Maybe so, but they come with a price. In the end, it’s the
borrower who foots most of the bill in the form of a higher
interest rate. The following example shows how:
Assume you borrow $50,000 for five years at a 9 percent interest
rate. Your monthly payment on the loan is $1,037. Assume, however,
that you pay a CAP fee of 3 percent, or $1,500; the bank also pays
a CAP fee of 3 percent, or another $1,500, which it then charges
you. If the $3,000 in fees is taken out of the loan proceeds, then
as the borrower, you don’t really have $50,000 to work with. In
truth, your loan proceeds are really $47,000. But because
you’re making monthly payments of $1,037 on $47,000 worth of
usable loan principal, your effective interest rate is really 11.64
The situation doesn’t change much if you borrow $53,191 to
realize net proceeds of $50,000 after CAP fees. Here the effective
interest rate turns out to be 11.68 percent, an increase of 29.8
percent over the initial interest rate of 9 percent.
“It’s expensive when you look at it this way,”
says Dahlin. “Because [most] businesspeople will borrow at the
lowest rate possible, these higher rates are truly for those who
could not get a loan without the program.”
A Better Place To Be
Slightly higher interest rates notwithstanding, most state
economic development professionals, as well as entrepreneurs, agree
that programs such as CAP are an efficient way for the government
to help businesses get loans–especially when you consider there is
almost no bureaucratic intervention in a CAP loan. In fact, Dahlin
says, all that participating banks in his state need to do is fax
him a one-page application, which enrolls each new loan in the
program. “That’s all there is to it,” he
says–assuming the bank doesn’t call eligibility into
One of the reasons the CAP loan process is so simple is the
participating government agency has very little at risk. It’s
very different from SBA-guaranteed loans, where the government is
responsible for 75 to 80 percent of a loan’s value. It’s
much more palatable when the government has little risk in
promoting credit. According to Dahlin, for every dollar that the
state of Oregon puts up for CAP reserve funds, another $23 comes
from private sources.
Participating in CAPs is optional for banks in states that offer
the program. Of the 60 or so banking companies in Oregon, for
example, there are 30 enrolled in the program, Dahlin says. And of
those 30, just 19 have made CAP loans.
For Dickson and his Medix Ambulance Service, none of these
statistics matter. He’s just glad there’s a Capital Access
Program to begin with. “I think the program is
tremendous,” he says. “Without it, I would have been
Spreading The Word
The popularity of Capital Access Programs (CAPs) nationwide is
on the rise. In addition to New York City, Milwaukee and Akron,
Ohio, the following states currently offer CAP loans:
To find out which banks participate in the Capital Access
Program, call your state’s office of economic development and
ask to speak to a finance officer.
Medix Ambulance Service Inc., 2325 S.E. Dolphin Ave.,
Warrenton, OR 97146, http://www.medix.org
Oregon Economic Development Dept., (503) 986-0170,