By Pacific Coast Business Times Staff Monday, August 17th, 2009

Just when it seemed that the credit crunch couldn’t squeeze any harder, thousands of small businesses in California found that it could.

Nationwide, credit cards rates were up, bank loans were trickling out and federal aid was still slow in taking effect. And then, with a few sentences of legislation tacked on to the state budget bill, the state’s Small Business Administration loan program — which currently guarantees loans for almost 3,000 companies in California — was all but eliminated with the final signing of the budget in late July.

“The timing of this elimination was just horrendous,” said Mark Robertson, president and chief executive officer of the Pacific Coast Regional Small Business Development Center in Los Angeles.

The Small Business Loan Guarantee Program is California’s version of the Small Business Administration’s nationwide 7(a) loan program. It guaranteed 90 percent, or up to $500,000, of loans made by banks and other lenders to small businesses that didn’t meet the traditional underwriting criteria for such loans. Sometimes the program even loaned to businesses with no collateral.

“It was kind of like the state co-signing on a loan,” Robertson explained. His organization, along with the 10 other Financial Development Corporations in California, administered the program, working with lenders in their respective areas to provide loans for qualifying small businesses.

But on July 28, the loan-guarantee program found itself tacked on to the California budget along with 31 other smaller trailer bills, awaiting the chopping block.

Officially, the program has been suspended, not eliminated, but Robertson said that in his book it’s all the same. The $375 million program — which secured loans for 2,595 businesses and drew in about 1,100 new businesses each year — will begin to be dismantled as existing loans are paid off. Robertson said the program provided loans to businesses that collectively employ 25,000 people in California.

The newly-signed budget bill indicates that the program can’t issue new loan guarantees and allows for the transfer of funds from the program’s trust – something that Robertson’s organization believes will cause a run on the fund as banks worry that the state will no longer guarantee those loans.

Robertson said the suspension of the program will not only eliminate the opportunity for new businesses to obtain those state-guaranteed funds, but will also prevent businesses from renewing existing lines of credit because banks will no longer have the security of a state guarantee. Lines of credit currently constitute about 20 percent of the existing program loans.

The state’s Financial Development Corporations, of which Pacific Coast Regional SBDC is one, were created specifically with the purpose of administering the state’s loan guarantee program. Since then, the organizations have branched out to include broader business services such as business counseling, and now, that may be all they’re doing, Robertson said.

But Aaron Dyer, owner of Dyer Consulting Group in Thousand Oaks, said government-backed lending programs such as the state’s were becoming less effective even before the California budget forced its suspension.  “Banks were already pulling back from lending, whether government-guaranteed or not,” he said.  “We’re in a credit crunch; banks don’t want to lend because they’re holding on to their capital.”
With or without a guarantee from the state, financing a small business has been especially hard since the onset of the recession.  “It’s very difficult right now, especially for small businesses in the start-up stage,” Dyer said.

Federal funds
Help from the federal government – whether it be in stimulus dollars or loan guarantees –  has been slow in taking effect, even as politicians around the nation tout the necessity of small business to the nation’s economic recovery.

The federal recovery act, signed into law in February, included two of three measures outlined by then-candidate Obama in October to increase capital availability to small businesses. Obama’s three-part campaign plan had called on the SBA to increase its loan guarantee to 90 percent, to reduce the fees it charges lenders and to provide a program through which small-business owners could bypass banks and lend directly from the SBA. Only the first two proposals ultimately passed along with the stimulus bill.

And while the SBA is guaranteeing more loans than it did before the passage of the stimulus bill, its most recent quarterly report, for the period ended June 30, showed that its main lending program administered 30 percent fewer loans this year than it did in 2008, and 55 percent fewer than it did in 2007.

In lieu of a direct lending program through the SBA, Congress pushed through with its own direct government loan program. The $335 million program, launched in mid-June, offers small-business owners interest-free loans of up to $35,000 to temporarily cover payments on existing business debt.

Many lenders expressed concern that the loans, although 100 percent government-backed, were unprofitable and paperwork-intensive.

And despite the political rhetoric, Dyer from the Thousand Oaks consulting firm said too many hopes are pinned on the federal government’s stimulus bills and loan guarantees in the first place.  “The problem is they come out with a press release saying that this is going to happen, but the reality is that often times there’s no program for how it’s going to happen, “ he said.  “People think something is going to come along tomorrow that will ease the credit crunch — I think expectations need to be tempered. “

Commercial lending
Since the onset of housing market crash and the ensuing recession, banks have attempted to stem the hemorrhaging by selling of existing assets and limiting new loans in an attempt to keep up capital ratios.
“Home equity was a source of capital for a lot of people,” Dyer said.  “Home prices are down, so equity is down.

And not just that, but it also means there’s less collateral available for banks to lend on,” he said.

CIT Group, the nation’s largest small-business lender, is scrambling to avoid bankruptcy with a massive restructuring plan, and has sharply pulled back on lending. The company delayed filing its most recent quarterly report with the Securities and Exchange Commission, saying that it could not be reasonably expected to meet its deadline during a restructuring.

Credit cards
Credit card financing has always been a quick, albeit comparatively expensive, source of short-term financing for many small businesses, but with rates up and minimum payments up, just swiping the plastic isn’t as easy as it once was.

Credit card defaults, which historically track the jobless rate, caused credit card profits to plummet in the first half of the year as the unemployment rate peaked. That, in turn, left consumers and smal businesses alike with higher average credit card rates and fewer credit offers to choose from.

Advanta, the top small-business credit card issuer at the time, shut its accounts down in May following a surge in its uncollectible debt and left 1 million customers nationwide scrounging to find new lenders.

Days after Advanta announced that it was shutting down its credit card business, President Obama signed into law his credit card reform bill, although it only regulates consumer credit card business practices and excludes corporate cards from its provisions.

Dyer said the increased cost of swiping plastic has left many small-business owners in the lurch.  “Credit card rates are high, and a lot of minimum payments are up, so that’s just more cash these businesses are seeing go out the door each month,” he said.

Avoiding a credit crunch
Dyer also said that some business owners are even turning to factoring — selling off accounts receivable at a discount — for quick cash. To avoid such drastic measures, he emphasized that businesses plan further in advance.

“The No. 1 thing is to know what your business needs in terms of capital each month,” he said.  “Do cash-flow budgets and be realistic about them. “ He said that by continually forecasting its capital needs several months in advance, a business can most effectively avoid cash crises by giving itself time to foresee them, cutting costs where necessary and shopping around for the best credit card and loan offers.

“It’s about preparation,” Dyer said.  “If you see that you’re going to be $10,000 short three months in advance, you can apply for a micro-loan from the SBA, or shop around for the best credit card rates.

“It’s only once you have your own financial house in order, and know how much you’re going to need each month, that you can turn to the best external financing, he said.

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