Small Business and Entrepreneurship Resource Center
Insights from the Field
Perspectives from Leading Practitioners and Researchers
Interview with Marlon Mitchell, Executive Director, Houston Business Development Inc.
Dallas Fed: What have been the biggest successes and challenges that your clients have faced since 2009? What successes and challenges do you expect in 2011?
Mitchell: During the current economic climate, being successful means being able to weather this financial storm and stay afloat as we slowly recover from the recession.
Due largely to the economy, there have been small and few successes. While some of our clients in the government, education and health sectors have had some success, across the board small businesses have been challenged financially because of the economy. The recession officially ended in June of 2009, yet it does not feel like it because of high unemployment rates and the lack of job growth.
Small businesses are seeing erosion in their sales and overall financial condition, which hurts their creditworthiness. At the same time, because of regulatory constraints, banks have tightened their credit standards, so businesses are often not deemed creditworthy when they try to borrow.
The lack of consumer and investor confidence has also resulted in the slow economic recovery we are experiencing. People are simply not spending due to uncertainty about where the economy is going. Businesses are wary of a double-dip recession and a further decline in their sales. As a result, many business owners are reluctant to take on more debt in an effort to expand.
In 2011 I anticipate many of the same challenges. Successes will hinge directly on how much we are able to recover economically. On a positive note, we are already starting to see some signs of recovery that should continue into 2011. Larger global banks are reporting profits, and many are making loans to larger middle market and corporate clients with sales in excess of $20 million.
While smaller businesses that support most of our job growth—those with less than $20 million in sales—have not been able to access capital, there is some help on the horizon with the recent passage of the Small Business Jobs Act that will make $30 billion available to small community banks and provide tax cuts for small businesses. As the smaller community banks begin to lend more and consumer confidence rebounds, small businesses should experience a corresponding increase in sales and improvement in their financial condition and be better positioned to make capital investments for growth.
The challenges small businesses face will remain the same: Consumers are not willing to spend when they are worried they will not have their jobs tomorrow, and small businesses are not going to take on debt if their sales continue to be stagnant. Challenges such as these will not be as severe once the economy starts to operate on all cylinders, including continued growth in various industry sectors, stable job growth and the availability of capital.
Dallas Fed: What have been the biggest successes and challenges that Houston Business Development has faced since 2009? What successes and challenges do you expect in 2011?
Mitchell: Our biggest success is that we are still able to help businesses access capital in spite of the economy. We have continued to make loans to businesses that are seeking startup capital as well as to those seeking capital to expand but that have not been able to access conventional sources of bank capital. The challenge that we have faced since 2009 and that is likely to continue well into 2011 is the obvious downturn in our economy, which has resulted in loan applicants with weak financial positions and declining profitability. In many instances, business owners have overextended themselves with retail and credit card debt with high interest rates, further impairing their overall creditworthiness and our ability to extend credit.
While we are a community-based, nonbank lender, our services are designed to support healthy, viable businesses that are seeking to expand and thereby create jobs. However, many of our applicants today are in survival mode and need working capital to support payables and payrolls that are not being supported through internally generated funds.
Because of the economy and the credit risk associated with weaker applicants, we have made adjustments to our underwriting and the products we offer. To accommodate our clients’ changing needs, for example, we launched the Fast Track Micro Loan program that provides expedited small loans up to $15,000, coupled with management and technical assistance services. The program provides low-cost access to small loans that can be used for working capital, among other things, with minimal application requirements.
As for 2011, we are excited about Houston’s new mayor, Annise Parker, and the direction of the city’s community and economic development activities. A new holistic approach will revitalize and grow our neighborhoods, including safe, affordable housing, quality education, public safety and job creation.
Houston Business Development Inc. (HBD) is a nonprofit, community-based lender that serves as a community/economic development arm of the city of Houston, and we will work closely with the city to provide capital to small businesses, promote entrepreneurship and create jobs. As we partner with the city, we look forward to further expanding our services and garnering additional resources to assist small businesses in Houston and the surrounding areas. Given the $300 million that will soon be made available to community development financial institutions (CDFIs) as part of the new Small Business Jobs Act, we hope to position ourselves to participate in the program. Although we are not officially a CDFI, we function like one in that we make loans and give technical and management assistance to startup and new businesses in low-moderate-income census tracts.
Another opportunity we see is in partnering with Lone Star State Capital Corporation, a Texas-based SBA Certified Development Company, and other commercial lenders who have specific lending parameters. While Lone Star can make up to $5 million in real estate and equipment loans through the SBA’s 504 loan program, businesses will often need capital for furniture and fixture purchases, working capital, etc. that can be provided by HBD.
Dallas Fed: What impact do you anticipate the Small Business Jobs Act of 2010 to have on you and your clients?
Mitchell: It should help smaller banks, particularly community banks, in accessing low interest rate loans from the government, the proceeds of which can be made available to small businesses that need capital. The increase in bank lending to smaller businesses will have a positive impact on us, as well as our clients, since we often make loans in tandem with banks to help mitigate credit risks associated with marginal loans. Other provisions under the act, such as increasing the size standards for SBA loans, waiving fees and providing technical assistance funding to small business development centers, should also have a positive impact on our small business clients and open the door for more lending.
The tax cuts for small businesses included in the bill should also help to stimulate capital investments by small businesses.
Dallas Fed: What have we not yet discussed that you think is important to bring up, particularly to industry analysts, your constituents and/or policymakers?
Mitchell: Policymakers should continue to look at the social and economic impact of CDFIs and alternative lending organizations in their efforts to help small businesses. Given the mission of these community-based lending entities and their flexibility in extending credit to small businesses, they can be an effective economic development tool to help stimulate growth during tough economic times.