Loans for Just About Anyone Seeking More Capital

Next time you head off to ask your friendly neighborhood banker for a business loan, remember this acronym: CalCAP.

If your banker doesn’t know what CalCAP means, find one who does. CalCAP--or the California Capital Access Program--is a state-sponsored effort to make it profitable for banks to lend money to firms that don’t otherwise qualify for loans.

Up and running for 3 1/2 years but still largely unfamiliar to small-business owners, CalCAP turns traditional banking on its head. Indeed, the program goes against the grain of most other government-sponsored efforts to help small business in that it doesn’t specifically target businesses run by minorities or women. It seeks only to get capital into the hands of business owners who need it, pure and simple.

Ten banks--Wells Fargo, National Bank of the Redwoods in Santa Rosa, Grand National Bank of Alhambra, BankAmerica’s Community Development Bank, Charter Pacific Bank of Agoura, Union Bank, Bay Bank of Commerce in San Leandro, County Bank in Merced, Western State Bank in Duarte and Home Savings of America--have lent about $204 million to 1,500 businesses statewide since the spring of 1994.

In the five-county Los Angeles area alone, the banks have lent more than $87 million to about 560 businesses. Thirty other banks have looked into the program but don’t participate.

Wells Fargo, by far the biggest lender in the program, carries a portfolio of 1,200 loans totaling $180 million made to businesses statewide. According to Michael Gallagher, a Wells Fargo vice president who oversees the bank’s government loan programs, half that amount went for lines of credit and about a quarter of it went to term loans.

In practical terms, this means that half the borrowers used the money for working capital and about one-fourth for expansion programs.

The money isn’t cheap; a bank loan made under ordinary lending criteria remains the least expensive way to borrow this side of your rich Aunt Sadie on those days when she chooses to like you. Like the other banks in this program, Wells Fargo prices its loans according to risk, with interest rates running between prime plus 3.5% and prime plus 6.75%. In addition, the borrower pays 2 points into a loan loss reserve to cushion the bank against defaults.

But the money also comes with some big pluses:

* The state sponsors the program but doesn’t meddle, so you don’t have to jump through a lot of paperwork hoops to get the money.

* You can borrow at fixed or variable rates and short- or long-term (up to seven years).

* You can use the money for almost any legitimate business need--for example, as working capital to meet seasonal needs, as expansion capital to buy equipment, to finance a marketing plan, even to buy land.

* No taxpayer money goes to subsidize the program.

* Almost any small business meets the state’s eligibility requirements.

You still have to meet the bank’s lending requirements, of course, the most important being that your business be profitable; CalCAP doesn’t lend to start-ups. Gallagher says Wells Fargo lends to profitable businesses showing healthy growth.

* You don’t need a lot of collateral to back up the loan.

A typical loan yields $150,000; the maximum is $2.5 million.

The Legislature established CalCAP to entice banks to lend money to small businesses generating profits but not showing enough collateral to secure an ordinary bank loan. The money that subsidizes the loans, however, comes not from taxpayer funds but from fees levied on “private-activity” bonds issued by industry to finance pollution-control work.

The fees flow into a loan-loss reserve, half of which comes from the pollution-control bond fees. The other half comes from the banks and the borrowers. The split between bank and borrower is negotiable in theory, under the state’s rules, but rarely in fact.

Whatever the breakdown, it’s the loan-loss reserve that makes this program different. As Gallagher puts it, bankers like to underwrite for zero losses; they seek only those borrowers most likely to repay the money. If a bank doubts a potential borrower, it looks for a better candidate--hence the popular notion that ordinary mortals can borrow money from banks only if they don’t need it.

“But if the lender can underwrite for losses approaching 8% and still make a profit,” Gallagher says, “it must certainly expand the pool of possible borrowers.”

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Surely it must. Gallagher says it’s too early to judge the overall performance of the loans Wells Fargo has made under the program. Losses run to 5.4% so far, far more than the 1% in losses that a bank might expect from a 3-year-old portfolio in hard times. The portfolio looks profitable nonetheless, Gallagher says.

That’s important to the bank, of course. What is far more important to the business owner is the fact that few, if any, of the businesses borrowing under CalCAP would have had access to ordinary bank borrowing.

Business loans are hard enough to come by unless you can post collateral, and CalCAP, by expanding the pool of possible borrowers, goes a step or two down the road to solving the biggest problem small business faces: finding money to grow.

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@compuserve.com