New State Plan to Guarantee Loans to Small Businesses

Declaring a need to promote “grass-roots capitalism,� California Treasurer Kathleen Brown on Tuesday unveiled an unusual state program that will guarantee credit to small businesses that have trouble getting conventional loans.

Called the Capital Access Program, the plan creates a form of insurance that allows private lenders to make loans to small businesses that might not otherwise qualify, Brown told a news conference in front of Founders National Bank of Los Angeles, a black-owned bank that intends to participate in the program. As much as $40 million in loans could be made based on the initial funding of the program, which is expected to begin operating in early March.

“We’ve all heard talk from Sacramento about a California economy that will be rebuilt job by job, job by job,� Brown said. “But those are empty words unless we can support small business with capital so that they can expand and hire new workers.�

The program will create special reserve accounts designed to spread the risk of potential defaults among the lenders, borrowers and the state. The program will not use taxpayer money; instead the reserve accounts will employ fees paid by large companies that have issued tax-exempt pollution control bonds, as well as premiums paid by the participating borrowers and lenders.

What’s more, no bureaucracy will be created to administer it, Brown said. The financial institution making each loan will do all the work and then will simply submit a one-page form to the state to demonstrate that the loan qualifies for the program.

The program “reduces the risk to banks so that more money can be loaned to our small businesses,� Brown said.

Here’s how the program works: The small-business borrower pays a onetime premium of between 2% and 3.5% of the loan amount into the special reserve account. That amount is matched by the lender. The state fund kicks in as much as the borrower and lender do combined, and in some cases contributes more. If the small-business owner stops paying, the lender is reimbursed from the fund, which grows with each new loan.

Carlton Jenkins, president of Founders National, said he has been “befuddled� by government’s inability to ease the credit crunch. Jenkins already has two small-business owners lined up to participate in the Capital Access Program who haven’t been able to get credit because of recession-generated cash-flow problems.

“These are people that in your guts you know that the first checks they write each month will be to Founders National Bank, but the minute you put them on your books you have to classify them as substandard loans,� Jenkins said.

One of them, Barry M. Davis, owner of Celebrity Plumbers, hopes to hire 15 to 20 more people if he gets money for uniforms, vans, a bigger location and employee training.

“I need a loan,� Davis said. “But we’re without the collateral that they need.�

An initial $2 million is expected to back about 800 loans averaging $50,000 each. The program was made possible by legislation authored by State Sen. Steve Peace (D-San Diego) and developed by the California Pollution Control Financing Authority, which is chaired by Brown.

The CAP loans can be made only to businesses whose operations affect the environment or which are regulated by an air quality management district, but most types of businesses will qualify.