Small entrepreneurs who are looking for capital may soon benefit from a new initiative, once details are finalized.
The Commonwealth Development Authority has unveiled a plan to create a “Microloan Guaranteed Program,” which will serve as a catalyst for larger loans offered by the federally-funded State Small Business Credit Development Initiative program.
CDA loan manager Oscar Camacho said the microloan guaranteed program could be implemented fast, effectively, and will have an impact on the CNMI business environment.
Under the program, CDA will work with commercial banks and will provide 80 percent guarantee on short-term loans specific to small businesses, fishermen, and farmers, among other borrowers.
Based on the initial proposal presented to the board Tuesday, CDA plans to allocate $750,000 for the program and aims to initially guarantee 50 loans in the following disbursements: 12 loans amounting each to $35,000 or less; 13 loans amounting each to $15,000 or less; and 25 loans each amounting to $10,000 or less. Recommended payment term is up to two years.
Camacho described the program as a “bridge” to better the relationship between banks and borrowers. The objective, he said, is to graduate the borrowers in two years and eventually enter into the SBCDI, which is also a bank-driven program.
Based on Camacho’s initial recommendation, the maximum “microloan” is $25,000 for 1- or 2-year term. Approval of the $25,000 loan application will entirely depend on the CDA executive director while anything beyond that amount would require the board’s sanction.
“This is simply a loan guarantee but which is limited to microloans. The idea is: rather than CDA giving a direct loan [to the borrower], we could utilize the funds by depositing them similar to what we’re doing in the past,” said Camacho, adding that rather than just a signature on a guarantee, CDA would now deposit the funds under the proposed microloan guaranteed program.
It was reported that, as of this week, banks are receptive to the idea and have actually recommended increasing the maximum microloan from $25,000 to $35,000.
According to CDA board chair Diego Songao, board members came to a consensus to support the new initiative that, they agreed, would support the success of the SBCDI program.
Camacho earlier reported that, as this week, only four loans were being processed under SBCDI.
The board put off approving the new program, pending some changes to the proposal.
Board member Marcie Tomokane was hesitant about the idea of providing short-term notes to business borrowers. For borrowers like farmers and fishermen, she believes a two-year term is unrealistic.
Tomokane, along with director Glenn Quitugua, was also cautious against the proposed $750,000 allocation for the program. The two believe that the start-up amount could perhaps be lowered to $600,000.
Tomokane also wants to see a final set of rules, guarantee provisions, requirements, and other information related to the new program.
“If this is for microloans, I don’t think it’s going to work. I don’t think anyone out there or a fisherman can afford a two-year term. And I don’t know if the banks would allow a 2-year guarantee on a 4-year loan, especially when it is a signature loan. For a startup, it takes five years to prove your business,” Tomokane reminded fellow board members.
CDA executive director Manuel Sablan believes that buying microloans from banks is a better option for the agency.
“Why don’t we ask the banks and let CDA buy the loans? Let’s explore that possibility! When you look at our financial statements, you will see a very limited return on our money. We have $1 million sitting in the bank and giving us less than 1 percent interest. That, for me, doesn’t make sense,” Sablan said.
Camacho explained that once the loan guarantee expires in two years, banks can extend the terms for borrowers if they see fit. “If banks feel comfortable, they can enroll them to SBCDI. And that’s the push [of this microloan guaranteed program],” he said.
He added that borrowers will be subject to CDA regulations.
Songao concluded Tuesday that since the board has reached a consensus to support the program, final details must be presented at the next meeting in the hopes that the initiative will take effect next month.