Small business owners who cannot get a loan from a traditional lender may find a solution at California Southern Small Business Development Corp., a nonprofit, state program that provides loan guarantees to help offset riskier loans by banks.
“We mitigate the risks so the bank can make a loan,” said Michael McCraw, California Southern’s chief executive who has been at the helm since 1989.
While many borrowers seeking a loan often think their request should easily qualify, the fact is that since the onset of the recession many banks have tightened underwriting standards and are far more conservative in their lending than ever before, McCraw said.
“If a request for a loan does not fit their criteria, it’s just rejected,” he said.
That was the scenario for Richardson Steel Inc., a Spring Valley steel fabrication business. In 2011, Richardson had its line of credit pulled by its lender even though the line had no balance and the company always paid it off when it did, said Natalie Lautner, chief financial officer.
“With the downturn in the economy our financials didn’t look as good,” Lautner said.
After contacting a few other lenders, Richardson found Torrey Pines Bank, which was unable to make the loan but knew about Cal Southern.
“Our banker, Burt Brigida, assured us they could get it done,” she said. “It was a long and tedious process, but in the end, we got what we wanted.”
Richardson used the $250,000 line of credit to nearly double its workforce to 49 people, and service its contracts. It usually has about 10 to 20 projects going at any time. “We’ve used (the line) it all,” Lautner said. “It couldn’t have come at a better time.”
Cal Southern is one of 11 entities in California that guarantee small business loans that banks are reluctant to make on their own. The program, which is operated through the state’s Business, Transportation & Housing Agency, has provided more than 30,000 loan guarantees in its 40-year history, according to the program.
While many of the loan requests come from lenders, some businesses also go directly to the loan guarantee agency like Cal Southern, but ultimately, the loan funds come from the bank.
Many small businesses in recent years have been damaged by the economic downturn, and because of the hits they sustained, cannot qualify for a loan, McCraw said.
But if a business is still viable, has decent cash flow and is servicing its debts, they deserve another look, he said.
Many small business owners that are still operating have done everything they can to survive, including using their retirement nest eggs, and drawing whatever equity they have left from their homes, McCraw said. If there are some aspects of the business that need improving, Cal Southern often works with the prospective borrowers to get the issues resolved and act as an advocate on behalf of the business to get the loan approved, he said.
While Cal Southern has worked with dozens of lenders in the past, its go-to lenders are AmericanWest Bank, Opus Bank, Silvergate Bank, Torrey Pines Bank, and North Island Credit Union. The loans range from $50,000 to about $1.5 million but technically can go as high as $20 million, McCraw said.
The agency guarantees up to 80 percent of the loans. Loan terms can go up to seven years but most are for three to five years, with interest rates at prime plus 2 to 3 points, or between 5.25 to 6.25 percent. Most borrowers have fewer than 20 employees and many have fewer than 10, he said.
The loans are backed by a state trust fund that has about $39 million in support for all the guarantees made by the 11 state programs. The program is similar to that operated by the federal Small Business Administration, but doesn’t receive an annual budget allocation. Each entity is supposed to operate at a profit, with revenue coming from 2 percent fees charged on the guaranteed portion of each loan.
In 2009, the state Legislature appropriated the trust fund, temporarily ending the state’s guarantee program. But, seeing the error of its ways, the funding was restored in early 2010, and the program resumed.
In the last three fiscal years, Cal Southern’s numbers have dropped far off what it had been doing in the years before the Great Recession. Not only did the banks dramatically curtail their lending, but demand for new credit dropped off significantly, McCraw said.
In the fiscal year ended June 30, 2009, Cal Southern provided 171 loan guarantees for about $10 million in loans. In FY 2011, it did 96 loan guarantees for $3.4 million.
In 2012, Cal Southern stopped providing guarantees on micro loans. McCraw said the fees on micro loans were too small to generate the income necessary to maintain the program’s operation. For the past fiscal year, Cal Southern made 32 loan guarantees for a total of $6.6 million, with the average loan size at $206,000.
Cal Southern received more loan requests in the past year, and is seeing more viable businesses than it has in the past three years, evidence that the economy is slowly recovering, McCraw said.
“We’re also seeing more regional banks’ lending activity increasing,” he said.
Terrece Madrigal, manager of Silvergate Bank’s business lending, said she is well aware of Cal Southern’s program, and worked with customers to obtain loans using it since 1999.
Among some of the recent loans Silvergate has done using Cal Southern were for a certified public accountant, a fitness center, and a nutritionist, with the average loan size about $200,000, Madrigal said.
“It’s always been a very good working relationship, and they’ve always supported us in getting deals done,” she said.
The program is a better alternative to many small businesses that cannot obtain a traditional loan but show signs that they are a good credit risk, she said.
Without this program, these businesses would be forced to seek financing through factors or hard money lenders, each of which charge much higher interest rates, she said.
McCraw got into the financing industry after putting in hitches in both the U.S. Navy and Coast Guard and attending UC San Diego to earn a bachelor’s degree in cultural anthropology in 1978.
In the early 1980s, he moved to Michigan and became the head of a state program aimed at helping minority business owners obtain financing. That experience eventually led him to his current position, overseeing a program that helps struggling businesses find the capital they need.
“I enjoy seeing small companies grow and watching them become larger,” he said.