CALIFORNIA COMMUNITY BANKS are hoping that a low-paperwork state program will help them lend to more small businesses.
The lack of credit to small businesses took on a special urgency in California in the last year, as the state's economy continued to emerge from the recession at a slower pace than the rest of the country. The California Bankers Association and other business groups in the state pushed for a program that would give small businesses easier access to capital and, hopefully, create jobs in the process.
To that end, the California Legislature this year passed a law creating the Capital Access Loan Program, modeled on programs in Michigan and several other states. A CAP loan, as its called, uses a lender-specific, dedicated loss-reserve account to provide the necessary credit support to transform a marginal borrower into an acceptable credit risk.
Gregory Wilhelm, director of government relations at the California bankers group, said he hopes banks will find the loan program "as useful and hassle-free as other states with successful programs."
Indeed, California's community banks could benefit most from the program, because they are more likely to identify promising new businesses that wouldn't otherwise qualify for credit. Also, these loans require less paperwork than a Small Business Administration loan and utilize the bank's own underwriting procedures.
Yet, some bankers aren't sure another program is needed to stimulate small-business lending in the state, which has been ravaged by defense industry layoffs.
"The problem is with demand," said James Ryan, chief executive of the Bank of Walnut Creek, a $108 million-asset bank near San Francisco. "Our existing lines of credit are usually around 70% drawn, and they're, running around 25% now. So we're out there trying to get new deals as it is."
Under the program, the loss-reserve account becomes an "insurance fund" for the bank's portfolio of capital access loans. It is funded by the borrower, the bank, and the state.
The borrower pays a fee (ranging from 2% to 3.5%), the lender matches the fee, and the state antes up an amount equal to the sum of the lender's and borrower's fees. Thus, up to 14% of the loan amount is allocated to the dedicated loan-loss reserve account, which is kept on deposit with the lending bank.
In this way, public funds, a scarce commodity in California these days, are leveraged 20:1. In other words, for every dollar the state puts up, $20 in loans can be protected.
Interestingly, the state funding for the program came from excess funds in the California Pollution Control Financing Agency. Recipients of the loans, therefore, must have a positive impact on the environment of the state, although Mr. Wilhelm said this restriction won't be limiting.
There's no limitation on the amount of CAP loans a bank can make under the program. The maximum amount a small business can borrow depends on the size of the fee, but in any case can't exceed $2.5 million. In Michigan, which has an identical program, the average loan size is $50,000.
