Hartford Business Journal

16 Hartford Business Journal • March 9, 2015 www.HartfordBusiness.com only nine defaulted borrowers. EXP's current default rate of less than 1 percent would be the envy of some banks; default rates of 2 per- cent or less are generally considered healthy. DECD Commissioner Catherine Smith says the default rate is tiny relative to the size of the Small Business Express Program (EXP), add- ing the state hasn't given up trying to recoup its investment through collection efforts and work- outs, or, ultimately, foreclosing on collateral. The latest disclosure of EXP's perfor- mance, contained in DECD's 2014 annual report, comes as Gov. Dannel P. Malloy pro- poses in his 2016-17 budget to provide $100 million more in taxpayer borrowings to expand the program to assist small firms in some of the state's neediest urban regions. But some headline-grabbing shutdowns and alleged fraud among a number of EXP recipi- ents has raised questions about the efficacy of the program and the value of extending it. Some business awardees say EXP's long- term value to Connecticut's economy beyond job creation is perhaps immeasurable. But state Sen. Scott Frantz (R-Greenwich), a ranking member of the General Assembly's Commerce Committee, questions the wis- dom of pumping more taxpayer money into EXP to create jobs that could be achieved through other, more cost-effective means. "I would prefer," Frantz said, "to have a stronger, more attractive business environ- ment through lower taxes, easier regulations, lower costs of doing business as opposed to trying to lure companies to the state with grants and low-interest loans and such." Tighter scrutiny To be sure, Malloy's EXP program has had its mix of successes and failures. Since its launch in January 2012, 16 EXP borrowers have fully repaid their loans totaling just over $2 million. However, repayment does not mean those borrowers have fully met their job-retention/creation commitments. In a late-February interview about the EXP program, Smith noted that the shortest EXP- loan term is five years, so the maturity clock is still ticking on the earliest batch of aid hand- outs. That makes it hard, she said, to tally which recipients have met their jobs commitments. Marlborough accounting-firm entrepre- neur Robert E. "Bob" Davis says the $95,000 EXP matching grant he got in 2013 helped him meet his commitment to add eight staff- ers, boosting its workforce to 19, within 24 months to pursue more small-business clients. Combined with his matching investment, the monies bought new software, more office furniture and equipment, and paid for mar- keting, including an enhanced website, Davis said. Unlike DECD's loans, its grants don't have to be repaid. "I don't think we would be there without the help of this grant,'' he said. "It helped jumpstart our growth.'' West Hartford Fence Co. used its $75,000 EXP term loan and a $50,000 matching grant to add three more full-timers to its previous four- person crew, said owner Benjamin Cox, who launched his business in 2010. He also invested in new equipment, vehicles and a larger building/ storage yard in town, on Custer Street, one street over from its previous home on Cody Street. "It's given us the confidence,'' Cox said of EXP, "to run our business efficiently and effectively.'' Hartford biomedical firm Genomas Inc. leveraged its $250,000 EXP loan and $100,000 grant into its best year ever in 2014 by market- ing its personalized-medicine technology to primary-care physicians on the East Coast, said founder/CEO Gualberto Ruaño. Genomas also hired five graduates from UConn's masters in science degree program, young minds who would have easily found jobs almost anywhere in the country, Ruaño said. Asked about the virtues of Connecticut's investment to create or retain jobs, he and other recipients say indeed it's a question that is open to debate. But Ruaño says job creation is only one factor in determining EXP's overall worth. There is value, he says, in helping com- panies tap new mar- kets and customers. "How do you quantify it?" said Ruaño, who last cen- tury built and later sold another successful Connecticut biotech. "You build jobs as you build value for differ- ent companies." Defaulted borrowers Smith reiterated that DECD's staff of loan/ grant underwriters remain diligent as to who qualifies for EXP aid. The agency's in-house workout specialists also pay close attention for the first signs of trouble among recipients. Once a loan recipient falls 30 days behind on repayment, Smith said "we begin bugging them,'' usually with a single phone call that is enough to get them current. Debtors who fall farther behind get extra attention, sometimes with DECD offer- ing to waive interest payments for a short time to give troubled borrowers more breathing room. In addition to the 24 defunct borrowers, at least 23 other EXP recipients had been sent as of late February official notification from DECD that they are nearing default and offer- ing them workout solutions. Defaulters are referred to the state attor- ney general's office, "which begins a full-court press'' to recover EXP loans through collateral seizures or other legal remedies, Smith said. "We do our very best to get back the taxpayer money,'' the DECD commissioner said. "We're really looking for them to work with us on how they're going to remedy this. It's being patient about getting your capital back. Our hope is they don't wind up on this [out-of-business] list.'' Despite DECD's attempts at remediation, some EXP borrowers' have had more success drawing negative headlines than running their businesses. Hartford broker Hybrid Insurance Agency LLC got a $100,000 revolving loan and $26,320 matching grant through EXP. But Hybrid shut in 2013 and owner/CEO Earl O'Garro Jr. faces insurance-fraud charges over his handling of more than $1 million in premiums from the city of Hartford and an insurer. In late February, Hartford's Back9Net- work, a startup golf-feature TV channel that got a $250,000 EXP loan and $100,000 grant as part of a larger $5 million state aid package indefinitely suspended operations after laying off much of its staff in January. Back9 was current on its DECD loan as of Feb. 25 and, until recently, had met its obliga- tion to expand hiring, the agency said. How- ever, Back9's woes have landed it on DECD's "watch list,'' Smith said. Process improvements As a result of those experiences and feed- back from EXP recipients and those who applied but did not get funding, DECD has modified some of its underwriting proce- dures, particularly closer scrutiny of appli- cants' actual and projected cash flows. With so many EXP applications missing crucial documents or other information, each application now has a check-off list as its cover sheet to help applicants track whether they've provided all the required information, speeding the process. DECD won't process incomplete applications, Smith said. Also, many recipients griped about high legal fees paid to close on their loans. Those fees ranged widely from about $1,000 to $5,000, she said. Premier Accounting's Davis said he spent about $2,000 on legal fees to close on his grant. To even out those costs, DECD hired five Hartford area law firms, which now handle all EXP-related legal work for a flat fee or preset hourly rate. EXP grant recipients pay a flat $1,000. Loan recipients pay either a flat fee of $1,500 to $2,800, or an hourly rate tied to the complexity of the assignment and whether a law-firm partner, associate or paralegal is doing the work. Overall, Smith says EXP's success is evi- dent in Connecticut's falling unemployment rate and job creation that has recovered nearly all the jobs lost during the Great Recession. Also, continuing EXP makes sense, she said, because it will be funded through low interest rate (3.13 percent) state borrowing, rather than the operating budget. "That's probably as low as you're going to see it in our lifetime,'' said Smith, a former banker for UBS in Stamford. "If you're going to borrow, this is probably the best time to do it.'' DECD is coordinating with the governor's office, Smith said, on ways to leverage EXP aid into urban communities like Hartford, Water- bury and New London, with stubbornly high unemployment rates. Smith said it was too early to elaborate on what forms that leverage might take. "We have some interesting ideas,'' she said. n Back9 on DECD's 'watch list' from page 1 Express exits These former Hartford area businesses are among 24 Connecticut recipients of Small Business Express (EXP) job-creation-retention loans and grants since January 2012 who closed after getting funding from the Department of Economic and Community Development. Company Location Express aid West Hartford Deli Inc. West Hartford $47,500 matching grant Serenity Shield Berlin $100,000 loan; $100,000 matching grant Hybrid Insurance Agency Hartford $100,000 loan; $26,320 matching grant Cuffie Communications Bloomfield $50,000 loan Bristol's Market Place Bristol $100,000 loan S O u r c e : D e c D Back9Network executives joined Hartford leaders in a ribbon-cutting last April for the golf channel's downtown office-studio. P H O T O | H B J F i l e Catherine Smith, Commissioner, DECD A worker for West Hartford Fence Co. fashions a wooden post. P H O T O | S T e v e l a S c H e v e r

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