HomeMy WebLinkAboutAgenda - 03-13-2007-9e Orange County Small Business Loan ProgramORANGE COUNTY
BOARD OF COMMISSIONERS
ACTION AGENDA ITEM ABSTRACT
Meeting Date: March 13, 2007
Action Agenda
Item No. , -~• ~,_
SUBJECT• Orange County Small Business Loan Program
DEPARTMENT: Economic Development PUBLIC HEARING: (Y/N) No
ATTACHMENT(S): INFORMATION CONTACT:
A. Recommendations for Change
B. Loan Fund Discussion Dianne Reid, 245-2326
C. 501(c)(3) Determination Letter
PURPOSE: To grant $75,000 currently held in a loan loss reserve account for the Orange
County Small Business Loan Program to the non-profit Orange County Small Business Loan
Program Company to .serve as seed money for a revolving loan fund and to transfer an
additional $75,000 to the Company so that the full $150,000 originally committed to the program
is available for lending to small businesses in the County.
BACKGROUND: In 2000, Orange County established a program for small business loans to
help stimulate the creation of good jobs for Orange County residents as well as to stimulate
successful business development and expansion in Orange County.
To accomplish this, anon-profit entity, the Orange County Small Business Loan Program
Company (the Company), was incorporated:
To assist Orange County...in carrying out the County's governmental functions through
serving as a conduit entity to make and facilitate loans to small businesses in the
County...
In June 2002, the Company received its IRS determination letter stating that it is "exempt from
federal income tax under section 501 (a) of the Internal Revenue Code as an organization
described in section 501(c)(3)." The IRS letter is provided at Attachment C.
Eight participating banks each committed to lend up fo $62,500 to the Company, at the prime
interest rate, with money to be re-loaned to businesses at prime plus 2-3 percent, depending on
the term of the loan. The total commitment of the eight banks was thus $500,000. Orange
County provided a loan loss reserve equal to 30 percent of the total pool, or $150,000.
The Company had a 9-member Board, including 6 bank representatives and 3 County
representatives. The operating structure was designed as follows:
1. EDC staff and participating banks market the program to potential borrowers
2. EDC staff provides initial review of applications
3. Full 9-member Board makes loan decisions
4. Upon approval, each bank lends 1/8 of loan amount to Company and Company re-lends
to borrower at prime plus
5. EDC staff services loan (Each monthly payment collected to be split 8 ways and repaid
to banks)
During the three years of bank commitment, 60 qualified borrowers received loan packages.
Seven of these fully completed the applications. One package was taken to the Board;
however no loans were made.
The Economic Development Commission and the remaining members of the Board of Directors
of the Small Business Loan Program Company have endorsed the recommended loan program
changes shown in Attachment A and recommend that the Board of County Commissioners
grant the $75,000 currently held in the loan loss reserve account and an additional $75,000 to
the non-profit Company to establish a revolving loan fund.
FINANCIAL IMPACT: A total of $150,000 would be granted to the non-profit Orange County
Small Business Loan Program Company, an amount equivalent to the original loan loss reserve
established by the County in 2000. Funds totaling $75,000 remain in the account, and the
remaining funds could be transferred immediately or included in FY2008 funding.
RECOMMENDATION(S): The Manager recommends that the Board approve the grant of
funds to the Company. Further, the Manager recommends that the EDC provide regular
quarterly status reports to the Board on the progress of the loan program and the operations of
the Company, including all changes to the loan program policies such as making non-profit
enterprises eligible for loans.
Attachment A
Orange County Small Business Loan Program
Recommendations for Change
In formal action at its November 9, 2006 meeting, the Orange County Economic Development
Commission (EDC) endorsed the following recommendations regarding the operation of the
Orange County business loan program and the Orange County Small Business Loan Program
Company (the Company):
a. That the $75,000 remaining in a County loan loss reserve account be granted to the
Company to serve as seed money for a revolving loan fund
b. That the County grant an additional $75,000 to the Company to restore the full amount
originally committed to the Program
c. That the Company solicit grants from banks and other entities to enhance the fund after a
track record of successful lending is established
d. That program operating policies and procedures be .revised to make the loan program
more accessible to borrowers (specifics to be determined by the Company board)
e. That the composition of the Board of Directors of the Company be changed to include
• 2 small business owners (1 of whom should have at least 3 years in business)
• 2 bankers (preferably based in different parts of the county)
• 1 Board of County Commissioners member
• 1 Economic Development Commission member
• the EDC Director
EDC member Jim Evans, who has had experience with a similar fund operated by the Rural
Center and is currently with Harrington Bank, led a discussion of key ideas, shown in
Attachment B.
EDC members stressed the importance of informing potential borrowers about the extensive
technical assistance resources available in the community. Other ideas included providing
incentives to attend business planning classes (for example, possibly a reduced interest rate)
and convening small business borrowers classes, akin to first time home-buyers classes. EDC
members stressed the need for the company directors to be willing to take risks.
At a meeting of the Board of Directors of the Company on December 12, 2006, the members
unanimously endorsed the EDC recommendations, agreeing that the former program structure
was overly cumbersome and restrictive. Among the possible changes that have been discussed
are:
• making non profit enterprises eligible for loans
• making Orange County businesses whose owners live outside the county eligible for
loans
• specifically excluding medical charge offs (disproportionately held by low income and
uninsured persons) from credit history considerations
• using the experience of the business owners on the Board to ensure that the application
forms are relevant and user-friendly
• strengthening marketing of the program through community partners
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Orange County Loan Fund Discussion
"Demonstration" project .
o This initial pool of funds should be viewed as "seed" money only.
o Additional capital funds will be needed over time for pool to survive and flourish.
o This pool of funds is sufficient to lend to 3 to 10 businesses.
o Losses will range from 5% to 20% of the fund. ,
o Goal is to lend them money so they can eventually borrow from a bank: .
Set expectations in the right place.
o. Focus should be'on people who have realistic chance of starting a successful
business.
o A positive outcome is keeping someone from starting a business whose odds for
success are low.
o Loans for $5K to $25K will create few jobs .until significant numbers of nevv
businesses are started.... at the outset, the program will not be a powerful job
creation tool on a "macro" level.
o For those starting a new business, keeping their day job and getting help from
SBC or SBTDC are very important.
Financial literacy is an issue -~ many do not understand the basics of how a
business is started and how it survives.
o Many cannot put revenue, expense, and profit numbers to.paper in a way that
others understand.
o For many, the exercise of developing apro-forma income statement is important,
yet very challenging.
o Credit issues will be a barrier for many..
o "On time".payments are a must to preserve the fund and to instill discipline in
borrowers.
o Some will ask for 100% funding of their project. Borrowers need to inject some of
their own money.
Credit approval issues .
o Many existing businesses are started using credit card debt. Our guidelines say
that we will not re-finance existing .debt, yet we will face requests to add new debt
on top of existing, high interest rate, credit card debt.
o Many have weak equity positions -few outside assets they can use as collateral.
J.im Evans
Harrington Bank
913-3212
jevans@bankatharrington.com
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DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Orange County Small Business
Loan Program Company
PO Box1177
Hillsborough, N.C: 27278
Dear Applicant:
Employer..Identification Number:.. .
56-2218660
Issuing Specialist: James L. Joseph
I D# 50-03778
Toll Free Customer Service:
877-829-5500
Accounting Period Ending:
June 30
FQUndation Status Classification:
509(a)(3)
Form 990 Required:
Yes
This is in reply to your application for recognition of exemption under section 501(c)(3) of
the Internal Revenue Code.
Based on the information supplied, and assuming your operations will be as stated in your
application for recognition of exemption,. we have determined you are exempt from federal
income tax under section 501(a) of the Internal Revenue Code as an organization described in
section 501(c)(3):• .. •~ ' ~ ~• . ±~ .. . _ _ _
Pursuant to the!automatic. extension provided .undersection~ 301:9100-2 °of the Procedures
and Administratiori Regulations, or based on the facts and circumstances: represented in your
request for relief under section 301.9100-3, an extension of the period allowed for the filing of
the notice required under section 508(a) of the Code and section1.508-1(a)(2) of the Income
Tax Regulations is granted. Accordingly, your exemption under section 501(c)(3) is effective
beginning on the date you were organized.
We have further determined that you are not a private foundation within the meaning of
section 509(a) of the Code; because you are an organization described in the section(s)
indicated above.
Please notify the Ohio Tax Exempt and Government Entities (TE/GE) Customer Service
office if there is any change in your name, address, sources of support, purposes, or method of
operation. If you amend your organizational document or bylaws, please send a copy of the
amendment to the Ohio TE/GE Customer Service office. The mailing address for that office is:
Internal Revenue Service, TE/GE Customer Service, P.O. Box 2508, Cincinnati, OH 45201.
You are liable for taxes under the Federal Insurance Contributiens Act (social security
taxes) on remuneration of $1.00 or more you pay~to each ofyour employees:d'urin'g:a.calendar
year:: You are~not liable for the tax imposed under the Federal Unemployment Tax Act.
F r, _
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Re: Orange County Small
Business Loan Company
If you are involved in an excess benefit transaction, that transaction might be subject to the
excise taxes of section 4958 of the Code. In this letter we are not determining whether any of
your present or proposed arrangements would be considered an excess benefit transaction
resulting in tax under section 4958. Additionally, you are not automatically exempt from other
federal excise taxes.
Donors may deduct contributions to you as provided. in section 170 of the Code.
Bequests, legacies, devises, transfers, or gifts to you or for your use are deductible for federal
estate and gift tax purposes if they meet the applicable provisions of Code sections 2055, 2106,
and 2522.
Donors (including private foundations) may rely on this ruling unless the Internal Revenue
Service publishes notice to the contrary. However, if you lase, your 509(a) status as indicated
above, donors (other than private foundations) may not rely on the classification indicated above
if they were in part responsible for, or were aware of, the act that resulted in your loss of such
status, or they acquired knowledge that the Internal Revenue Service had given notice that you
would be removed from that classification. Private foundations may rely on the classification as
long as you were not directly or indirectly controlled by them or by disqualified persons with
respect to them. However, private foundations may not rely on the classification indicated
above if they acquired knowledge that the Internal Revenue Service had given notice that you
would be removed from that classification.
Contribution deductions are allowable to donors only to the extent that their contributions
are gifts, with no consideration received. Ticket purchases and similar payments in conjunction
with fund-raising events may not necessarily qualify as fully deductible contributions, depending
on the circumstances. If your organization conducts fund-raising events such as benefit
dinners, shows, membership drives, etc., where something of value is received in return for
payments, you are required to provide a written disclosure statement informing the donor of the
fair market value of the specific items or services being provided. To do this you should, in
advance of the event, determine the fair market value of the benefit received and state it in your
fund-raising materials such as solicitations, tickets, and receipts in such a way that the donor
can determine how much is deductible and how much is not. Your disclosure statement should
be made, at the latest, at the time payment is received. Subject to certain exceptioris, your
disclosure responsibility applies to any fund-raising circumstance where each complete
payment, including the contribution portion, exceeds $75. In addition, donors must have written
substantiation from the charity for any charitable contribution of $250 or more.
In the heading of this letter we have indicated whether you must file Form 990, Return of
Organization Exempt from /ncome Tax. If "Yes" is indicated, you are required to file Form 990
only if your gross receipts each year are normally more than $25,000. If your gross receipts
each year are not normally more than $25,000, we ask that you establish that you are not
required to file Form 990 by completing Part 1 of that Form for your first year. Thereafter, you
will not be required to file a return until your gross receipts exceed the $25,000 minimum. For
guidance in determining if your gross receipts are "normally" not more than the $25,000 limit,
see the instructions for the Form 990. If a return is required, it must be filed by.the 15th day of
the fifth month after the end of your annual accounting period. A penalty of $20 a day is
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Re: Orange County Small
Business Loan Company
charged when a return is filed late, unless there is reasonable cause for the delay. The
maximum penalty charged cannot exceed $10,000 or 5 percent of your gross receipts for the
year, whichever is less. For organizations with gross receipts exceeding $1,000,000 in any
year, the penalty is $100 per day per return, unless there is reasonable cause for the delay. The
maximum penalty for an organization with gross receipts exceeding $1,000,000 shall not
exceed $50,000. This penalty may also be charged if a return is not complete, so please be
sure your return is complete before you file it. Form 990 should be filed with the Ogden Service
Center, Ogden, UT 84201-0027.
Yoq are required to make your Form 990 available for public inspection for three years
after the later of the due date of the return or the date the return is filed. You are also required
to make available for public inspection your exemption application, any supporting documents,
and this exemption letter. Copies of these documents must be provided to any individual upon
written or in person request without charge other than reasonable fees for copying and postage.
You may fulfill this requirement by placing these documents on the Internet. Penalties may be
imposed for failure to comply with these requirements. Additional information is available in
Publication 557, Tax-Exempt Status for Your Organization, or you may call our toll free number
shown above.
You are not required to file federal income tax retums unless you are subject to the tax on
unrelated business income under section 511 of the Code. If you are subject to'this tax, you
must file an~income tax return on Form 990-T, Exempt Organization Business income Tax
Return. In this letter we are not determining whether any of your present or proposed activities
are unrelated trade or business as defined in section 513 of the Code.
Please use the employer identification number indicated in the heading of this letter on all
returns you file and in all correspondence with the Internal Revenue Service. Because this
letter could help resolve any questions about your exempt, status, you should keep it in your
permanent records. If you have any questions about this letter, or about filing requirements,
excise, employment, or other federal taxes, please contact the Ohio TE/GE Customer Service
office at 877-829-5500 (a toll free number) or correspond with that office using the address
indicated above.
Sincerely,
~~
Joseph Chasin
Acting Manager,
Exempt Organizations
Technical Group 2