When banks rejected their loan and credit applications, Christine Cochrum and Rachel Costello financed the expansion of their Federal Hill spa with the only capital they had access to: their retirement accounts and credit cards.
"We ended up having to pool our resources," Cochrum said. "We made the leap that way."
Now a community nonprofit group hopes to ease frustration of the sort experienced by Cochrum, Costello and other local entrepreneurs by offering low-cost financing targeted to immediate business needs. Federal Hill Main Street — Cochrum is a board member — plans to start accepting applications for small, short-term loans next month.
The organization is completing the program details and reaching out to local business owners to ask how they might use the funds, executive director Jane Seebold said.
"What we're trying to do is help businesses get stronger and grow," she said. "This is for businesses that are holding on but need a shot in the arm."
The effort is one of several aimed at making capital available to small businesses. An Eastern Shore nonprofit group is working with organizations in Baltimore and Baltimore County to provide loans. The state of Maryland has been awarded $23 million in federal funds to lend to small businesses.
The U.S. Small Business Administration started the America's Recovery Capital loan program to improve access to credit for businesses in temporary distress. The SBA's Baltimore district office, which covers all of Maryland except Montgomery and Prince George's County, issued 40 of those loans totaling $1.2 million in 2009 and 2010, said Oliver Phillips, assistant district director of business development.
Seebold said Main Street Federal Hill has been working on the problem for about two years. She said tightening credit really began to challenge local business owners around 2008. Businesses that had been granted lines of credit and never used them found that they had been closed.
"When the crisis hit, things dried up really quickly," she said.
Michael Schollaert, who volunteers as chairman of the business development committee at Federal Hill Main Street, said business owners began turning in greater numbers to high-interest credit cards.
"A lot of businesses weren't able to find traditional forms of funding," he said. "When borrowing on a credit card that has very high rates, that certainly affects profit margins. The cost of money is higher."
"We were seeing all this unfold and thought, 'We have to find a way to get businesses the money that they need,'" Seebold said.
While researching funding sources, they discovered that the SBA had a program that guaranteed loans made by nonprofits to small businesses.
But the program works only with nonprofits that have underwriting experience. So far, only one group in Maryland participates: Salisbury-based Maryland Capital Enterprises Inc.
Without the necessary credentials, the Federal Hill group decided to offer loans on its own.
"Even if we didn't become an SBA microlender, we would still be able to administer a program that would help local businesses," Seebold said.
Schollaert said the group might eventually be able to parlay the experience into becoming an SBA lender, or attract a lender that provides more funding.
"We had kind of felt we had gone many routes to find sources of funds for businesses," Schollaert said. "Maybe we're not going to be able to do it at a large level, but we can begin making loans, even if they're small ones."
Federal Hill Main Street will lend up to $3,000 for one to three years at low interest rates, Seebold said. The loans are not intended to rescue businesses on the brink of failure, she said, but are for those looking to grow or expand in some way: a chocolatier expanding into selling greeting cards, for example, or a retailer making facade improvements to a store; or a business overhauling its website or buying time with a consultant.
The board of directors has set aside $5,000 for the program, which will be supplemented by a grant from the Baltimore Community Foundation and a contribution from a donor.
Andrew Stonebarger, who owns both The Book Escape and Tradestone Gallery, called increasing access to capital a positive step.
"Anything that brings a little bit of credit into a small businessman's hands is not a bad thing," he said. But he also expressed concern about the process for approving the loans.
Seebold said an independent underwriting board would be established to review applications, which would include a business plan, financial statements, credit history and tax returns.
The program could offer larger amounts in the future, as Maryland Capital Enterprises now does. That organization is certified by both the SBA and the U.S. Department of Agriculture to do microlending and small-business loans, said Joseph E. Morse, a former chairman who serves a a special adviser.
MCE is working with small-business groups in Baltimore such as Women Entrepreneurs of Baltimore to offer loans of up to $15,000 at interest rates of 6 percent to 12 percent.
Morse said groups such as MCE can be more flexible than banks.
"Banks have all sorts of regulatory restraints," Morse said. They might require applicants to have a minimum credit rating, for example, or be in business for a certain period of time.
Schollaert said local groups also benefit from their knowledge of the community.
"We know what the successful businesses in Federal Hill are," he said. "We know that's not always translated on your [profit and loss] statement."
Still, he said, "we're not going to make loans for charitable purposes."
Morse said borrowers can use the program to rebuild a poor credit history, because their loan repayments will be reported to the credit bureaus. In this way, they can become potential candidates for bank loans in the future.
Cochrum, of Apothecary Wellness Spa, said she would have been eager to take advantage of microloan programs such as these.
Cochrum and her partner needed the money to move from their former location, which had only two treatment rooms.
"There was definitely a ceiling of how much we could bring in a month," she said. "We were at the point where we were actually booking people two to three to four weeks out."
They applied for a line of credit from a smaller bank and a loan from a national company but were rejected.
"We kept hearing that smaller banks and more local banks are pro-small business and want to help us out. It's the bigger banks that are saying, 'No, go away,'" she said. "Either way, it didn't work."
So they turned to their retirement savings and their credit cards. Since the move in February, Cochrum said, they have doubled their revenue in the first month and exceeded their goals every month since. Apothecary has grown from five staffers to 13, working in five rooms. The additional space allowed them to offer a new service: acupuncture.
Cochrum said she never was told why their credit applications were rejected, but suspected it was the business's age. Apothecary just marked its third anniversary.
"They're basically not taking chances on businesses that are less than five years" old, she said. "How are you supposed to get to five years when you don't have the capital to do it?"