A Lender Who Is Starting Small : Business loans: Western General Capital Corp. of Sherman Oaks invests private and federal money into small firms from Laundromats to herbal tea stores.


Cheng-Hsung Tsai has suffered hard times since he and his family immigrated from Taiwan seven years ago. His English is poor, so he had trouble finding a job. In Taiwan, Tsai was manager of a garment factory, but in the United States he could only find work in restaurants and carwashes.

A few years ago Tsai hit on the idea of running a coin-operated laundry business, but he couldn’t get a bank loan to help him get started.

Then Alan Thian entered the scene. Thian, 38, is president of Sherman Oaks-based Western General Capital Corp., one of about 390 small business investment companies (SBICs) throughout the nation that are licensed by the federal Small Business Administration and are eligible for federal money to make loans to start companies or buy investments in them.

With a $250,000 loan from Western General, Tsai recently bought two Laundromats near downtown Los Angeles and replaced several of the 120 washing machines and 70 dryers with new, large-capacity machines that cost $5,000 apiece.

Thian said Tsai will take in about $480,000 in revenues this year, but the company won’t turn a profit for five years, when the loan is due to be repaid in full. But Thian said he has faith in Tsai. “He convinced me he’s very hard-working,” Thian said.


Thian, a Singapore immigrant, started Western General Capital a year ago. So far, he has invested $1 million of privately raised money into three coin-operated laundry businesses, a home builder, an herbal tea store and a computer parts importing business. Under SBA rules, a new SBIC must raise at least $1 million in private capital and invest at least 65% of it in small businesses before qualifying for federal funds.

But by year-end, Thian hopes to start receiving the government funds, which he can invest in companies with greater potential.

If he’s lucky, Thian will find the next Apple Computer, which got its start with help from an SBIC in the 1970s. On the other hand, SBICs are known as the riskiest part of the SBA, and the number of SBIC liquidations has doubled in recent years as the economy has soured.

The SBA is best known for its bank loan program, which guarantees about $3.7 billion a year in loans to small businesses. For SBA-backed loans, banks are permitted to charge interest rates of up to 2.75% above the prime rate--the rate banks charge their most credit-worthy customers. That means banks can now charge up to 12.75% for their SBA loans.

But for many small companies that don’t qualify for bank loans, SBICs such as Western General are the only alternative.

Under a complex formula based on their borrowing costs, SBICs now charge a maximum interest rate of about 16%, although Thian has charged a 13% fixed rate so far to his clients. SBICs are also limited to investing in businesses with annual net income of $2 million or less.

Thian said Western General so far has made loans that have ranged from $100,000 to $300,000 and takes in about $11,000 a month in interest. After expenses, he said, he shows a profit of about $6,000 a month.

Western General is chartered by the SBA to help businesses that are hampered because of “social or economic disadvantages.” There are 133 of these SBICs nationwide and 26 in California. Western General is the only one in the San Fernando Valley.

Thian got the idea to start an SBIC a few years ago. Since immigrating to the United States in 1975, Thian has managed a family-owned restaurant, earned his MBA at USC at night andinvested in real estate--he now owns five houses in the Los Angeles area. In 1982 he became a director of General Bank, a small commercial bank in Los Angeles.

After serving on the bank’s loan approval committee, “I found out there are a lot of small businesses having trouble getting loans, especially minorities,” Thian said.

Thian and six other bank directors put in $1 million and received an SBIC license in August, 1989. He runs Western General out of a tiny office in Sherman Oaks, and has two employees.

Thian plans to start taking investment positions soon in start-up companies, but under SBA rules he’s limited to investing no more than 30% of Western General’s private capital in a single company. His long-term goal is to raise more private capital so that he can take bigger stakes in fledgling manufacturing companies.

“When you have $300,000 you’re getting into really small businesses like coin-operated laundries. You’re not really helping the economy that much,” he said. “But if I can help a business and help stimulate the local economy, that will be a bigger achievement.”

SBICs are eligible to receive up to four times their private capital in matching funds from the SBA, up to $35 million. That means Western General is now eligible for $4 million from the SBA.

Some billion-dollar companies, such as Federal Express and Intel, the computer circuits concern, got started with the help of SBICs.

For example, an SBIC owned by Continental Illinois Bank invested about $500,000 in Apple Computer when it was starting up in 1978. After Apple went public in 1980, Continental sold its position over a two-year period for a $44-million gain.

John Hines, the Continental SBIC’s now-retired president, “became kind of a legend in the industry after that deal,” said Mike Kim, Continental’s chief financial officer.

But such success stories are rare among SBICs. Since the program started in 1958, 465 SBICs out of a total of 1,597 have been placed in liquidation after defaulting on their payments. Since 1980, the backlog of the SBIC program’s liquidation portfolio has grown from $100 million to more than $500 million, and the number of SBICs placed in liquidation has doubled in the past five years.

“SBICs are the venture capital arm of the SBA,” said Bernard Kulik, who runs the SBIC program. “They’re probably the riskiest single operation in the agency’s inventory.”

Why are SBIC liquidations up? For one thing, many of the small companies that SBICs finance hope to sell stock to the public eventually and use the money to finance their growth. But Kulik said the market for new securities has never fully recovered from the 1987 stock market crash, hindering many SBIC-backed companies from raising enough money to keep operations going.

But officials admit that the SBIC program also suffers from internal problems. In testimony before the Senate Committee on Small Business last month, SBA Administrator Susan Engeleiter said SBIC problems also “result from spotty government oversight and supervision of the program.”

SBICs must have an independent audit done annually and must comply with certain regulations, such as limits on the size of companies that receive financing. But beyond that, it is up to each SBIC to decide which businesses it will invest in. “We do not pass on individual investments,” Kulik said.

The SBA also doesn’t place any restrictions on ownership of SBICs, nor does it offer a precise definition of “social or economic disadvantages.” It does pass approval on an SBIC’s manager, but offers few guidelines as to who would qualify.

Thian said he hopes to avoid the problems that have beset other SBICs by picking businesses that produce steady returns, rather than trying to strike it big with a high-risk technology or an oil and gas company.

He also said he’s leaning heavily on the expertise of Chris Lin, chairman of another SBIC, Myriad Capital Inc. in Monterey Park, which helped fund General Bank.

Lin said he “got burned pretty bad” when he started Myriad 10 years ago by investing in businesses with poor management, such as a seafood trading company that failed because of the owners’ lack of experience. Those early losses taught him to carefully scrutinize an owner’s background before investing, he said.

With advice from Lin, Thian said he has refused loans to applicants who wanted to start Laundromats because they lacked experience and their business plans “just didn’t make sense.”

The businesses that Western General has invested in are all owned by Asian immigrants. Thian said that’s because he has only invested private capital so far and initially turned to the community he knows best.

After he starts receiving government funds, Thian said he will start advertising his services and “I’ll extend loans to all nationalities and races.”