SBA Loan Packager Faces a Strike 2 Count

Robert M. Weinstein knows the struggle of starting a small business.

Two of his earlier ventures failed, wiping out $100,000 of his savings. His newest company, TransContinental Financial Services in Northridge, doesn’t have money to waste and he and his small staff are hustling for sales from a modest office filled with Weinstein’s cigarette smoke.

TransContinental might seem a candidate for a federal Small Business Administration loan. But that would be a conflict of interest for Weinstein. TransContinental’s business is helping borrowers apply for SBA loans and then trading those loans in the financial markets.

Weinstein charges a flat fee, $750, to help an entrepreneur apply for an SBA loan. He also expects to profit by purchasing SBA loans from banks, and then reselling the loans--at a higher price--to brokerage firms, banks and other investors.

The backbone of TransContinental is Weinstein’s broad knowledge of how the SBA works. But that does not ensure success. His two ill-fated companies also handled SBA loans, and now TransContinental faces strong competition and an uncertain demand for its services.

So why stick with the SBA-loan business? “Why did Edison keep going until he got the light bulb right?” snapped Weinstein.

“Why? Because the profit potential is vast. I’ve willingly, knowingly--not proudly, mind you--made every mistake there was to make and have benefited by them,” he said.

Between its founding on Aug. 8, 1986, and last Sept. 30, TransContinental was mostly a concept, with only $20,109 in revenue and a loss of $148,306. But two months ago the company raised a modest $405,000 by selling its stock to the public. A confident Weinstein predicts that the cash will help TransContinental generate nearly $3 million in sales and $810,000 in pretax profit for the year ending next Feb. 10.

He estimates there are 50,000 applications for SBA loans across the country each year, and “we’re saying that of the 50,000, we can generate 5% of the market,” or 2,500 applications.

Maybe so, but he’s off to a slow start. At the moment, TransContinental is processing less than a dozen loans for banks in the hope that those banks and others will refer more customers his way. “There are a hundred loan packagers around this city” from which to choose, said James E. Whitney, SBA loan manager at American Pacific State Bank, a North Hollywood-based bank that handled about $12 million in SBA loans last year.

There’s also no guarantee TransContinental’s investors will come out ahead.

TransContinental is clearly a “penny stock” for adrenalin-driven speculators. The company went public two months ago by selling 5 million units for 9 cents each. Each unit consists of one common share and one warrant entitling investors to buy another common share for 15 cents. Weinstein now owns 28% of the stock.

A big buyer of the units--more than 1 million at a cost of $90,000--was Autumn Wood Financial Associates, an investment firm in Walworth, Wis. Thomas J. Connelly, president, said Autumn Wood bought the units for itself and its clients because TransContinental is a company “we felt deserved an opportunity. There’s always room for someone who works a little harder relative to SBA-type loans.”

The 45-year-old Weinstein, who limps as a result of an auto accident when he was 18, was born in Brooklyn, N.Y., and grew up idolizing Brooklyn Dodger shortstop Pee Wee Reese. To this day he finds the Dodgers’ move to Los Angeles in 1958 “a very sore subject” to discuss. A painting of defunct Ebbets Field hangs in his office.

Yet Weinstein soon followed the team to California. He studied economics at Fresno City College, spent two years at Southwestern University School of Law, then left in 1966 to pursue finance. He was a stockbroker for five years, then was a financial consultant until 1979.

Recession, Interest Rates

That year he started Newcom Inc. to process SBA loans. But the company, with about $200,000 in annual revenue, went bankrupt in 1984 because of the recession and sky-high interest rates two years earlier, which dried up loan demand, he said.

“I was out there borrowing to keep everything going; I didn’t have the staying power,” he said. Strike one.

Weinstein tried anew in January 1985 by helping form NSM Holding Corp., which processed and traded SBA loans. “We were busier than the dickens,” he said. But four months later, three of NSM’s other top executives “decided to strike out on their own,” and Weinstein was unable to sustain the firm alone, he said. Over the next year he liquidated the business. “I went into my pocket in excess of $100,000 in cleaning everything up,” he said. Strike two.

But Weinstein still hasn’t soured on SBA loans.

The SBA, started in 1953, mainly guarantees small-business loans that are funded by banks and other commercial lenders. The SBA’s purpose is provide a helping hand for small firms--generally those with less than $4 million in sales and 1,000 employees--that otherwise might not get the financial credit they need.

In the year ended last Sept. 30, about $3 billion of SBA loans were made to 17,100 businesses. About 97% of the loans were guaranteed by the SBA, the rest were direct loans from the agency. The SBA will guarantee 90% of a loan up to $155,000, and 85% thereafter up to a total guarantee of $500,000. A borrower, for instance, could get a $1 million loan, but only half would be guaranteed by the agency.

But the SBA came under severe criticism in the early 1980s as the Reagan Administration tried to close the agency down. Opponents contended the SBA, with an annual budget of about $500 million, cost too much and served too few firms, and that its loans often were wasteful and abused by borrowers reluctant to repay. But the SBA has survived despite budget cuts and a reduced staff.

The borrower’s credit is usually checked by a local bank. But the borrower must complete an SBA application of several pages, in which he writes an outline of the business, forecasts its cash flow and details its financial statements.

Jerry Garner, assistant district director for the SBA in Los Angeles, said “more often than not the business applicant would be able to fill out the majority” of the paper work. But, to ensure the application is exactly what the SBA wants, a borrower often will pay the bank to help him--for a fee of between $900 and $1,200, Garner said.

But if the bank doesn’t process a lot of SBA loans, it might refer the customer to an outside SBA loan packager and that is where TransContinental fits in.

Weinstein does not guarantee the borrower will get the loan. But he claims TransContinental’s $750 fee is “50% of what the average packaging cost is,” and that its ability to ready an application within a week is twice as fast as most of competitors.

One of Weinstein’s rivals, Steven Stultz, owner of Stultz Financial in Newport Beach, agreed that Weinstein’s $750 fee is cheap, so cheap that “I don’t see how” Weinstein can make a profit “unless he’s getting it on the back end,” meaning that any losses from processing SBA loans are covered by profits from trading the loans.

Sold Like Mortgages

After an SBA loan is made, the bank can sell the portion guaranteed by the SBA to securities dealers and other investors in the “secondary market,” much like the way mortgages are bought and sold. TransContinental, through its TCF Securities Group unit, wants to be such a trader.

About $2 billion worth of SBA loans are traded overall each year. Major dealers, such as Union Planters National Bank in Memphis, buy several SBA loans and pool them into packages that are sold to such institutional investors as other banks or pension funds.

By selling an SBA loan, a bank refills its coffers to make additional loans. The bank continues to collect the borrower’s principal and interest payments on the loan, but nearly all of those payments flow through to the buyer of the loan.

Weinstein gave this hypothetical example. A bank lends a business $200,000, of which $150,000 is backed by the SBA. The bank then sells the SBA-guaranteed portion to TCF for, say, $155,000, and TCF in turn would sell it for 1% more, or $156,550, to a savings and loan, credit union, pension fund or other institutional investors. The appeal to a buyer is an SBA loan offer pays high interest rates: as much as the prime rate plus 2 3/4%. In any case, TCF’s profit on this one deal would be about $1,550.

Weinstein expects nearly half of TransContinental’s revenue this year will come from such trading. But there’s a hitch.

Although TCF Securities is qualified to trade loans by the National Assn. of Securities Dealers, it also must have a licensed officer to run the operation. Neither Weinstein nor Byron J. Sayre, who is expected to oversee TCF, have such a license--but both plan to take the licensing exam, Weinstein said.

In the meantime, Weinstein said TCF has lined up buyers and sellers ready to trade $10 million worth of SBA-backed loans. “We will consummate those trades as soon as Mr. Sayre and myself get clearance from the NASD, which hopefully will be in a matter of a week or so,” he said.

One of the sellers is Adobe Savings Bank in Concord, Calif., which confirmed plans to sell more than $1 million worth of loans through TCF. Adobe has sold loans to Weinstein’s previous companies as well, and “they’ve always paid us very promptly, so we have no complaints,” said Robert A. Roman, an Adobe vice president.

Weinstein also drew a cautious endorsement from Union Planters, the big loan broker. “We’ve done a few transactions with them; never a problem,” Brad Whitener, the bank’s SBA product manager, said of Weinstein’s previous companies. “We will continue to buy loans as long as he brings good quality loans.”

But Weinstein first must persuade banks either to sell him their SBA loans or refer loan applicants to him. On May 20, he’ll make a big pitch to a bankers’ convention in Kansas City, and he’s optimistic about the reception.

TransContinental “will sell itself,” Weinstein said. But as any investor and baseball fan knows, three strikes and you’re out.