The Michigan Economic Development Corporation (MEDC) has re-established the Capital Access Program.  It is a unique approach to state initiatives for small and medium-sized business financing.  Initially, the MEDC has $3.5 million budgeted for the program, which it can start loaning as early as April 1.

The Capital Access Program is based on a risk pooling concept.  Rather than concentrating the MEDC’s limited resources on making direct loans, this approach emphasizes private sector bank lending, investment and decision making.

For each bank participating in the Capital Access Program, a special reserve fund is established to cover future losses from a portfolio of loans that the bank makes under the program.  This special reserve fund is owned and controlled by the MEDC, but is earmarked in that bank’s name, creating a separate reserve for each bank.  A bank can withdraw funds from its earmarked reserve only to cover losses on loans made under the program.

The reserve is created when a borrower pays a one-time premium into the reserve for the loan.  This premium is then matched by the bank.  Then, the MEDC matches the combined total of the borrower and bank premiums.

The program sets minimum and maximum limits for the borrower’s payments.  At a minimum, it must be at least 1 ½% of the loan amount and 3 ½% at a maximum.  The premium and other up-front expenses may be financed as part of the loan.

Because of the payments that need to be made into the reserve, a loan under this program may be more expensive than a conventional bank loan.  Additionally, a bank may recover from the borrower the cost of the bank’s payment into reserve through a higher interest rate.  However, financing under the Capital Access Program is likely to be less expensive than alternative non-bank sources of financing.

The MEDC plays no role in the decision by the bank regarding making of the loan or in setting the interest rate, fees, duration or other terms or conditions of the loan.  Program eligibility is very broad-based, and with a few exceptions, encompasses any business located in Michigan that satisfies the bank’s criteria.  This program cannot be used to finance the construction, renovation or purchase of residential housing.

The Capital Access Program was originally launched in 1986.  More than 10,000 Michigan businesses received financing under the program until it was discontinued in late 2002.

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