For loans, uncles may beat Uncle Sam
For Cassandra Cooper and Rewa Scott, getting a bank credit line backed by the Small Business Administration was a welcome infusion for their temporary-employee firm.
Then disaster struck. The company lost its biggest client, and the bank, California Bank & Trust, wouldn’t budge when it came to reworking the credit line for Scott & Cooper Staffing Solutions.
The San Diego-based bank wanted Cooper, the staffing agency’s chief executive, to sell her Burbank house, refinance her mortgage or get a second home loan to pay off the debt. Although the SBA had guaranteed the loan, the bank claimed that Cooper’s personal assets were collateral.
The dispute, eventually settled by a jury in Cooper’s favor, provides a sobering lesson about SBA loans: Although the government guarantees 50% to 85% of the debt, it is the last stop, not the first, when banks go about collecting on a defaulted loan.
“You understand that if something happens and you can’t pay your bills, the SBA will be your backup,” Cooper said. “And it’s just the opposite.”
California Bank & Trust and its parent company, Salt Lake City-based Zions Bancorporation, declined to discuss the case. The bank’s attorney called the verdict “aberrant.”
That’s one reason entrepreneurs leery of risking personal assets for an SBA-backed loan should explore other financing options, including traditional bank loans. But even those are hard to get without providing collateral of some sort, experts say.
A more promising method is tapping the assets of friends and family. SBA-sponsored studies have concluded that the majority of funding for businesses with fewer than 20 employees comes from such “informal capital,” said David A. Walker, a Georgetown University business professor.
Growing companies with four or five years of solid profitability might be able to tap into receivables financing (selling unpaid bills at a discount to an outside company that specializes in collections), said Michael D. Ames, executive director of the Center for Entrepreneurship at Cal State Fullerton.
Some entrepreneurs also obtain funding from suppliers and customers that believe in the business’ model, Ames said, or from early-stage venture capitalists: “angel” investors specializing in start-up enterprises.
SBA-guaranteed loans are especially attractive, however, because minimum standards for borrowers are generally lower than on conventional bank loans and because SBA loans have longer repayment periods.
“That means the monthly carrying costs are lower on our loans, to assist the entrepreneur in meeting their other bills,” said Frank Brancale, a spokesman for the SBA’s Los Angeles district office.
But the guarantee isn’t what many borrowers might perceive. The SBA requires anyone who owns 20% or more of a small business to pledge personal assets to get a backed loan. Banks are going to attempt to exhaust all claims against the borrower before turning to the SBA to get their money, Brancale said.
Service companies, such as Cooper and Scott’s Los Angeles staffing firm, often have difficulty obtaining bank loans because they have no hard assets such as machinery or inventory to serve as collateral.
Scott had a background in temporary staffing when they launched their business in 2000. Cooper had worked in several other industries, including the record business, and brought organizational and marketing skills to the venture, which they billed as a boutique with more personalized service than big staffing firms.
“You will always hear a live voice when you call our offices,” they said on their website.
Although basically a two-woman shop, the business eventually added two and sometimes three part-time employees. They represented hundreds of temporary workers, many of whom wound up with permanent jobs elsewhere at businesses such as a Salick Health facility at Cedars-Sinai Medical Center, their principal client, Cooper said.
In 2002, Cooper and Scott sought a line of credit for payroll financing but were rejected by several banks. Bank of America, where they had their checking account, told them their track record was too short even with an SBA guarantee, Cooper said.
However, California Bank & Trust gave them a $50,000 line of credit backed by the SBA in June 2002. Things went well until late 2003, when they applied for a larger credit line at the suggestion of a bank representative, who told them, “You have been a great client,” Cooper said.
Then came the shocker: Even though they hadn’t missed payments on their debt, the bank declared them in default after reviewing their financial results, saying the firm was unprofitable. Their credit line was changed to a five-year, $42,781 term loan in February 2004 and their minimum payment jumped from $231 a month to $825, according to documents filed in the court case.
The documents show Scott and Cooper made their regular payments and often paid extra through that October, reducing the loan balance to $36,034, when they lost their biggest client, the facility at Cedars-Sinai.
Over the next six months, they worked out repayment deals on their Bank of America and Wells Fargo Bank credit cards, moved to a 550-square-foot office from one nearly six times larger, laid off the part-time employees and stopped drawing salaries. But after months of dickering, they were unable to reach agreement with California Bank & Trust, which in March 2005 sued the business and Cooper personally to recover its entire loan.
The dispute turned on whether Cooper in fact had guaranteed the debt. On her application for a California Bank & Trust business credit line in March 2002, Cooper said she owned 85% of the staffing venture.
The bank application Cooper signed, which did not mention the SBA, included in small print a “personal guaranty” of “any and all obligations arising under any loan/line of credit granted by the bank.”
Two weeks later, California Bank & Trust wrote to say Cooper didn’t qualify for the bank credit line she had applied for. Instead, it offered a $50,000 “SBA Express-guaranteed Business CashLine.”
The SBA credit line documents mentioned no personal guarantee, Cooper said, and they were signed not by Cooper but by Scott, her business partner. Cooper said the bank insisted on having Scott, as the company’s president, execute the agreement.
Cooper said she never intended to pledge her house to back a corporate credit line. She said she believed the bank granted her the credit because of the SBA guarantee.
Court documents show that in February 2006, a month before the trial, Scott made an offer to liquidate the business and pay the bank just under $29,000 -- nearly 80 cents on the dollar -- to settle the debt in full.
California Bank & Trust rejected that settlement proposal, Scott said, along with others that continued even as the trial got underway. “They just said no to everything,” she said.
The trial in Los Angeles County Superior Court took three days before a jury found Cooper not liable personally for the debt and awarded her $46,000 in attorney fees.
But the jurors ruled that the staffing business itself owed California Bank & Trust $25,000, and the bank wound up with a judgment of more than $40,000 against the firm after its attorney fees were added in.
Anaheim attorney William N. Elder Jr., who represented California Bank & Trust, said he had believed the facts were “pretty straightforward” in favor of the bank. Cooper’s signature beneath the personal guarantee section of the application showed she understood that her assets would be on the hook if the loan went into default, he said.
“Her attorney had a very clever argument and the jury agreed, which can happen,” Elder said. “My gut tells me that this was a case in which they felt sorry for this lady.”
Cooper and Scott said dealing with the dispute strained their personal relationship and soured them on their business, which has languished.
Scott said last month that she still hoped to revive it, but “at this moment we are not doing anything. We’ve been sent down to our knees.”
