Microloans for Small Biodiesel Businesses

Biodiesel companies need credit fast. Small, short-term microloans may be a viable finance option to sustain operations.
By Bryan Sims | October 25, 2010
High-profile banks such as AIG made headlines when they got bailed out by the federal government during the economic nosedive in 2008. But despite receiving bailout funds, they weren't too keen on giving up any of that money to small companies scrambling to find much-needed working capital. To get any form of cash today, small businesses are often asked to fork over major collateral, which defeats the purpose of getting a loan in the first place. In fact, many of the big banks were so shocked by their own balance sheets that they tightened lending requirements, making it nearly impossible for struggling business owners to qualify for loans. Small businesses, including small-scale biodiesel producers, waste oil collection firms and other upstream and downstream cogs in the biodiesel wheel that were targeted for growth in the American Recovery and Reinvestment Act of 2009, were stymied getting any form of credit.

When President Barack Obama signed the Recovery Act into law in February 2009 to create jobs and promote spending, the law included $56.1 million for microloans for small businesses, which were doled out by the Small Business Administration. The original program, which ran until September, is administered by banks of the SBA's choosing. Since September, however, Obama signed the Small Business Jobs Act of 2010, which expanded provisions previously set in the Recovery Act.

Designed to serve startup, newly established and growing small businesses, microloans are short-term loans with a ceiling of $50,000-an increase from $35,000 found in the original Recovery Act provision prior to the newly-signed SBJA. Microloans are distributed through specially selected nonprofit intermediary lenders across the country. Typically associated more with developing countries, microcredit has emerged as a mainstream practice in the U.S. with the microloans averaging about $13,000. Microloans can be used as working capital to pay employees, purchase new equipment and supplies, and rehire staff.

For small-scale biodiesel producers and others involved in the industry who are having trouble getting approved for loans elsewhere, the microloan program is a potential lifeline for obtaining immediate funding to supplement other capital sources, or to expand businesses, especially during a time when the $1 per gallon federal blender tax credit is expired. One biodiesel company in the Northeast found that obtaining a microloan fit the bill for its business.

Microloan at Work

Like many small biodiesel businesses caught in the credit crunch, Tri-State Biodiesel LLC was in dire need of working capital for equipment upgrades and to retain and hire employees.

"It's very difficult to get any kind of credit now," says founder and CEO Brent Baker, adding that he was turned down by three major commercial banks that had previously financed his company, prior to turning to Boc Capital. "It was just a hard sell [to commercial banks] to get any type of credit. Traditional banks are so risk averse these days."

Facing the possibility of layoffs or an inability to compete in the biodiesel market with old equipment, the Bronx, N.Y.-based company, which distributes biodiesel and collects waste cooking oil from 2,700 restaurants in the New York City area and cleans it up for sale as a biodiesel feedstock, managed to get a five-year $50,000 loan at a reasonable rate from Boc Capital. Boc is an intermediary lender through the SBA, which received $750,000 from the federal government thanks to the 2009 stimulus package. For Baker, the microloan was a solid option for his company to help finance upgrades to its oil rendering equipment, and hire more staff. "It helped us to increase our profitability," Baker tells Biodiesel Magazine. "We've actually grown and hired people as a result."

Before the economy sank in 2008, TSB planned to install biodiesel reactors at its rendering facility at a cost of about $5 million. Since the commodities markets crashed, Baker says the company adjusted its business model and settled for more frugal options. "What we did instead was we built a more modest oil recycling facility," he says. "We were able to do that for a lot more of a reasonable price."

When a potential borrower seeks out a microlender to obtain a microloan, intermediary banks are required to provide technical assistance throughout the life of the loan, which Baker says was an added benefit. Boc Capital, he says, provided TSB with a staff member from a local business outreach network center to help employee staffing and other administrative tasks for the company.

Other advantages Baker saw that helped his company when he applied for the microloan was that the application process was much simpler and quicker than the experience he would've had with traditional lenders. Though credit score requirements vary by each intermediary, microlenders seem to be more forthright when evaluating a business plan, and in helping the borrower plan, before funds are issued.

"They look at the business with a little more depth I think than a conventional bank would," Baker says. "Hopefully, programs like these can fill in the blank."

Pros and Cons

While the SBA's microloan program may be a viable finance mechanism for TSB to support business growth, the prospect may not be as appealing for others involved in the industry as a way to get through tough economic times.

AZ BioDiesel, a Gilbert, Ariz.-based biodiesel producer, is building a 10 MMgy facility two miles from from its 500,000-gallon-per-year plant in Gilbert. Rather than looking to a microlender, AZ BioDiesel instead turned to a local community bank where it obtained a $2 million loan to help with feedstock purchase and cover start-up costs of the new plant, according to President Dan Rees.

"If you're a tiny company, $50,000 may do something for you," he says. "For my company to continue at its growth rate, we really needed something like $150,000."

Midwest Biodiesel Products LLC, which operates a 12 MMgy multifeedstock facility in South Roxana, Ill., received a $300,000 loan in September from the St. Louis Business Development Fund and St. Louis Private Fund to rehire laid-off workers and buy soybean and vegetable oil. According to President Terry Zintel, a microloan shouldn't be viewed as a primary source of credit to sustain operations, since many have leveraged themselves into deep debt when financing the construction and start-up of their plants. He asserts that producers should be on the lookout for complete debt refinance packages they could apply for.

"These little band-aids generally don't help in the long run," Zintel says. "Lots of plants need a complete recapitalization effort, but that's nonexistent from the banks right now."

There are other loan provisions within the SBJA that provide similar benefits to the microloan program. One of those was a raise in loan maximums for plant acquisition, construction and expansion of biodiesel and ethanol plants from $4 million to $5.5 million.

Depending on its position and needs, a microloan may not be a funding solution for all biodiesel companies, but the microloan TSB received fit its needs, Baker says. "It's a good option to look at in terms of people in need of a smaller loan amount to get over a hump," he says. "For us, it was just what we needed."

Bryan Sims is a Biodiesel Magazine associate editor. Reach him at (701) 738-4974 or [email protected]
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