Program Overview
The Community Development Block Grant (CDBG) is a federal grant program utilizing funds received from the U.S. Department of Housing and Urban Development (HUD). The CDBG Revolving Loan Fund (RLF) has a few specific purposes for the funds, but our interest is for funding small businesses. Now don’t get your hopes up when you read ” Community Development Block Grant “. It’s not a grant to you or me, but is a grant to governmental entities (meaning cities, towns, etc.) and economic development groups to lend at low interest rates to support small businesses. (Ok there is leeway for the fund to grant money but the grants are typically used to support facade improvements, which is a separate program.)
The CDBG revolving loan program, as one of their goals is to improve the availability of money for small businesses that are unable to secure competitive financing.
Funding can be used for almost any typical business borrowing purpose, some of which include working capital, furniture, fixture and equipment (FFE), renovation costs, equipment, inventory and refinancing existing debt. Funds are only for micro enterprises which is five of fewer employees and this includes the owner(s) .
There are many different flavors of CDBG funding but typically you will see these loans in amounts up to $50,000. Some programs will require participation from other lending sources and some do not.
Rates for the CDBG revolving loan program range from 0% to 5%. Terms are typically tied to what is being funded but typically capped at 10 years.
Some funds are required to have the loan approved by their respective state agency which will sometimes complicate things. There are a few complicating factors, but the main two are the requirement of loans going to low-income individuals and paying prevailing wages for construction.
Collateral requirements will vary but because these funds are granted the pressure of repaying isn’t forcing the fund to thoroughly evaluating applications. There are programs that will require significant collateral and some that don’t. There isn’t much consistency here between the programs.
Out of the many revolving loan fund programs, CDBG revolving loans tend to be the most lax on reviewing applications and part of the reason is that the business loan program isn’t a focus for them. Most of the CDBG money ends up going to programs that help pay for people in need such as paying for utilities and emergencies. Not to say there aren’t many well run business loan funds, but my experience has been that many CDBG loan administrators are focused on helping low-income people and not trained to critically evaluate business loans which lets lots of subpar projects get funded. There is a downside to this and that is the money can go quickly or the fund has no capital.
How it works
Like all of the other revolving loan funds, the application will be evaluated by an administrator and/or loan review committee. If the administrator believes there are better sources of funding then they will refer the borrower to another organization or bank. The administrator will also review to make sure the project meets the CDBG definition of meeting a public benefit, national objectives and the need for the funds.
The administrator/committee makes an overall recommendation and the funding is either approved or denied.
Many of these programs end up not putting a lump sum check in your pocket (with the exception for working capital) but they will send a check to the vendor you selected who then delivers you the product.
Expect six weeks to six months from application submission to approval.
Case Study
We worked with a client who had a checkered history to say the least and thus was unbankable. He was a great individual who had things happen in his life, but had a great idea for a contracting business.
We approached both a local revolving loan fund and a CDBG revolving loan program for $40,000 (The CDBG was limited at $20,000). A number of hoops were jumped through such as refinancing the clients truck with the loan fund in order to increase the available equity, but we were able to close the deal.
Total funding of this project was eight months as there was a lot of time trying to structure the deal to make the loan administrator warm up to the deal.
Why get a CDBG Revolving Loan?
This loan is only going to be of benefit if you can meet the income limits. It’s a great program that is underutilized but many funds lack the sophistication and knowledge of small business which may or may not be a good thing. There have been instances of trying to explain what I saw as a simple business model and the administrator did not get it, but there are others that have more insight than some financial professionals I have worked with .
Where to find a CDBG revolving loan
Check with your local economic development agency, chamber of commerce or www.BusinessLoanFunds.com.
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