A newly created community development loan program isn't going to send droves of workers back to the production lines in Modesto.
But the first loan, for $150,000, will enable American Metal Fabricators to pay the salaries of four new employees and generate more income.
After a brutal recession, the business in the Beard Industrial District recently secured $500,000 in contracts to supply fabricated steel products, but it didn't have the resources to hire employees to do the work.
The loan from the city solves that problem, and the contracts should enable the company to get another bank loan to buy equipment so it can take on bigger contracts.
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Wednesday evening, the Modesto City Council unanimously approved guidelines for the Community Development Revolving Loan Program and the first loan at a 5.5 percent interest rate. American Metal is supposed to make monthly payments on the debt over five years, with the payments and interest deferred the first year.
"It's probably not the only place we could get a loan, but it works out great for both sides," said business owner Mike Pyle.
Much of the work his company did for the construction industry went away during the recession, causing annual revenue to fall from $7 million two years ago to about $1 million this year, Pyle said. He laid off 20 workers in the past year; the 13 remaining employees fabricate steel into tanks, columns, boiler ducts and other items.
The revolving loan program is designed to help small companies employ more people or keep the workers they have. The funding comes from the federal Community Development Block Grant program, which requires more than half the jobs go to people in low- to moderate-income categories.
To be eligible, a business has to operate within Modesto's boundaries or its sphere of influence. As business owners make the debt payments, it puts money back into the pot for loans to other employers.
The fledgling program is short on funding. The $150,000 loan to American Metal Fabricators will drain the program's startup funds.
But city staff said an additional $250,000 could be designated for the loan program in the fall, and a bigger pool could be created in the fiscal year that starts July 1, 2011.
"I wish we had a lot more money to put in it," Councilman Brad Hawn said. "It really helps a business to get back on its feet."
Councilman Joe Muratore was more skeptical, having watched many businesses default on Small Business Administration loans. If companies are unable to repay the loans, he said, he doubts the city could recover the money in bankruptcy court.
Staff said the Stanislaus Economic Development and Workforce Alliance is working with the city to evaluate companies that apply for loans. American Metal put up collateral and got advice from the Alliance that helped to reduce its overhead.
Companies are having trouble getting conventional lenders to approve lines of credit for operating expenses, said Bill Bassitt, chief executive officer of the Alliance.
"There are banks that still do asset lending (for purchase of land, buildings or equipment), but the unsecured lines of credit have been pulled back," he said. "Many small-business owners have used the equity in their homes or credit cards for operating capital."
Bee staff writer Ken Carlson can be reached at firstname.lastname@example.org or 578-2321.