SB 302-MICROLOAN REVOLVING FUND  2:16:04 PM CHAIR PASKVAN announced SB 302 to be up for consideration. 2:16:11 PM GREG WINEGAR, Director, Division of Investments, Department of Commerce, Community & Economic Development (DCCED), said he supported SB 302. He said it would really benefit small businesses in the state, which in turn would help the Alaskan economy. As background, he said, his agency had administered a number of different state loan programs for many years and has the infrastructure in place to successfully run this one. MR. WINEGAR explained that this bill would create a new program aimed at helping small businesses access critically needed capital. This will help them not only start businesses, but grow existing ones. It is modeled after a very similar program that is available through the Small Business Administration (SBA) in 46 other states, but not Alaska. The reason is that that SBA requires having an intermediary lender, and no one in Alaska has stepped forward to run that program. This is an effort to provide similar types of loans for Alaska businesses that are available through SBA in other states. He said that essentially the program could loan up to $35,000 to an individual and up to $70,000 to two or more individuals; applicants need to be Alaskan residents. The loan proceeds can be used for a variety of things - working capital, equipment, construction or other commercial purposes. The maximum term is six years and they need to be fully collateralized. The interest rate would be based on prime plus one with a floor of 6 percent and a cap of 8. With existing interest rates that would work out to a 6-percent fixed interest rate. In terms of capitalization, Mr. Winegar said, his division had submitted a fiscal note for $3.5 million that would come from AIDEA. This funding mechanism is actually contingent on the passage of either SB 301 or its companion, HB 411. He said the fiscal note also had some operating expenses for one loan officer to process the requests, some start up expenses and a small amount of travel. He said they tried very hard to keep the fiscal note as low as possible, because they wanted the loan fund to "cash-flow" and be successful. They anticipate about 75 loans in the first year and about 100 in the second; then 25 loans thereafter. 2:20:36 PM SENATOR BUNDE asked how this loan program would be any different than the current AIDEA program that helps businesses that can't get loans through conventional means. MR. WINEGAR replied that this is a smaller, much shorter-term program. The maximum term is six years and it doesn't require going through a bank, which an AIDEA loan requires. It's targeted to smaller businesses that need a little bit of working capital. SENATOR BUNDE asked if rampant inflation occurs and the interest rate goes above 8 percent the state would be in a situation of either subsidizing these loans or not being able to make them, so why the cap? MR. WINEGAR replied that the thinking was to provide an interest rate that wouldn't get out of hand. The cap could be taken off and the rate could be just prime-plus 1. The division felt that it could successfully administer the program for much less than that. SENATOR BUNDE said while he was confident they wouldn't go above 8 percent, but if it did, that would either prevent loans from being granted or the dollars that would subsidize them would come from some other essential state service. He was concerned about the state having limited dollars in the relatively near future. MR. WINEGAR responded that he should have clarified that the original $3.5 million is actually set up as a revolving loan fund, so it won't need additional funding. The program would continue based on the interest it collects from the initial capitalization. SENATOR BUNDE asked if for some reason the interest rate went above 8, would running the program cost them more than they would be taking in. MR. WINEGAR replied that the funding is already there. The loan officer position over time might go up slightly, but he was comfortable that the program could be administered at the 6 percent level including risk. SENATOR BUNDE said the $3.5 million to capitalize this loan program comes as an AIDEA dividend and is money that could have been used somewhere else, and asked where that money would have potentially been used. 2:24:34 PM MR. WINEGAR replied that basically it reduces AIDEA's dividend, and he is correct that it could be used by AIDEA for something else. But this program ties into AIDEA's purpose, which is to promote economic development and help small businesses, as well. CHAIR PASKVAN said the interest rate is tied to the concept of being fully collateralized. What does that mean? MR. WINEGAR replied that they wanted to make sure if someone ends up in a default situation, that the division has a way to recover those funds for the state. So they left a lot of flexibility in terms of collateral to secure each individual project as best they can. It could be a variety of different things and loan terms plays into that. It could be secured with inventory, but that is fairly high risk. Others might have a building or a second deed of trust on a home. 2:26:15 PM CHAIR PASKVAN closed public testimony. SENATOR BUNDE said the micro-loan idea has done well in third- world countries, but his hesitancy comes from what he has heard that inventories have been left sitting and public funds hadn't been adequately protected. CHAIR PASKVAN said he believed it was a good bill and should move forward. SENATOR THOMAS asked what the definition of a small business is. MR. WINEGAR answered that the bill has a residency requirement; other than that it is pretty general. SENATOR THOMAS asked if it mentioned businesses over a certain gross amount of sales. MR. WINEGAR answered no. 2:29:51 PM SENATOR BUNDE asked for an estimate of the demand for these loans. MR. WINEGAR answered that the division estimated about 75 applications in the first year and about 100 in the second year. This capitalization would allow them to continue at the rate of about 25 loans per year. 2:30:58 PM SENATOR BUNDE asked for an example of some typical businesses that might be interested. MR. WINEGAR replied all types of little retail outlets, mom and pop businesses that need working capital or help putting in leasehold improvements, and things like that. SENATOR BUNDE remembered subsidizing the "made in Alaska program." CHAIR PASKVAN said he thought it would be important to hear how the program is doing in one and two years. MR. WINEGAR answered that was an excellent point. He said the division has some experience with other small business programs like the small business economic development program that involves EDA money, and a rural development initiative fund; he could provide delinquency rates on those programs, but they have been very successful. CHAIR PASKVAN noted letters of support in members' packets and read one from the Fairbanks Economic Development Corporation. 2:33:55 PM SENATOR MEYER moved to report SB 302 from committee with individual recommendations and attached fiscal note(s). There were no objections and it was so ordered. 2:34:18 PM CHAIR PASKVAN announced an at ease from 2:34 p.m. to 2:38 p.m.