Legislation Becomes Law to Aid Small Business Loan Program

In an October 7 post, California’s Capitol discussed legislation pending in the Senate allowing the state’s Small Business Loan Guarantee Program to continue guaranteeing loans.

During the final throes of budget negotiations in July, the loan program, whose supporters say is one of the few positive things the state does for small businesses, was added to a list of entities whose unencumbered funds were to be swept into the state’s cash-starved general fund.

In the case of the loan program, that amount totaled $8.3 million. State spending for the fiscal year that began July 1 is $110 billion.

The program allows businesses that otherwise wouldn’t be able to get a loan or line of credit from a bank to do so by guaranteeing the bank that the state will pay up to 90 percent of the loan amount in case of default.

At the end of the 2007 fiscal year, the program’s portfolio included nearly 2,200 guarantees for loans totaling $320 million. That same year was the fourth in a row in which the program experienced a less than 1 percent default rate.

In the budget deal signed by Gov. Arnold Schwarzenegger on July 28, the program was ordered not to guarantee any new loans and, as current guarantees expired, send that money to the general fund.

Backers of the program, which include banks and ethnic chambers of commerce, introduced a bill that would allow the program to continue guaranteeing loans.

Supporters of the bill say the guarantees are an incentive for banks to offer lines of credit or loans to small businesses. Without guarantees – or the assurance of future guarantees – lenders will either cancel existing loans or not award comparable ones in the future, backers argue.

The bill, SB 66, still sends $8.3 million to the general fund, about one-fifth of the program’s $40 million trust fund, but allows the guaranteeing of new loans as well as the renewal of existing guarantees.

Supporters of the bill worried that GOP senators would not cast the votes needed to send the bill to Schwarzenegger at a special session of the upper house October 14. Republicans had pledged not to cast the votes needed for two-thirds majority measures like SB 66.

However, the bill was approved unanimously by the 40-member house and sent to the GOP governor who signed it November 2.

Although not specifically targeted at women and minority owned businesses, 62 percent of the guarantees are to women and minority owned businesses.

The loan guarantees are obtained through 11 Financial Development Corporations around the state. The Financial Development Corporations, in turn, structure a deal with an applicant’s bank.

Loan proceeds must be used primarily in California to make a business improvement, like an expansion or new equipment purchase.

The percentage of the loan guaranteed varies but can be as much as 90 percent of the loan amount, up to a maximum of $500,000. Loan guarantees can last as long as seven years. Collateral is usually required.

Fees are charged by the development corporations for the guarantees – up to 2 percent for guarantees up to $150,000 and 3 percent for guarantees above that amount.

Because not all guarantees expire at the same time, the $40 million trust fund can be leveraged to offer guarantees totaling four times that amount. That’s why at the close of the 2007 fiscal year the trust fund secured $320 million in financing for small businesses.

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