Drop in state seed money puts small firms’ growth at risk

Less money is available through the California Small Business Loan Guarantee program, which may result in fewer companies getting funds

California seed money that has helped small businesses such as EarthSmart Products in Wilmington succeed is drying up because of the state budget crisis.

A 42-year-old state program to help small businesses get loans is stumbling partly because a chunk of its trust fund was used last year to help plug the budget gap, and officials say the program’s budget for the coming fiscal year has been cut in half.

Last fiscal year, the California Small Business Loan Guarantee program provided 1,035 loan guarantees for small businesses and family farms. Most borrowers received about $120,000, and the guarantees typically covered about 50% of the loan. These were bank loans and lines of credit with state guarantees issued through 11 nonprofit regional organizations.

Officials fear the reduction in available money for the loan guarantees will mean small firms will have a harder time getting the loans, which are intended to help strengthen the state’s small-business base and create new jobs.

“I am afraid some of these may not have the capital to stay open,” said Milton Flores, vice chairman of the Small Business Financial Development Corp. of Orange County, one of the regional nonprofits involved in the program. He is also an executive at Sunwest Bank in Tustin.

The Orange County nonprofit, like other program participants, has decreased the number of guarantees it issues but has no plans to leave the program, Chief Executive Michael Ocasio said.

The cut in money for loan guarantees could be especially painful for small businesses when the economic recovery picks up and more small businesses that qualify for the program need money to grow, program officials said.

“This will not last forever, and when things do turn around, this program will have been weakened,” said Mark Robertson, chief executive of Pacific Coast Regional Small Business Development Corp. in Los Angeles.

EarthSmart Products, which manufactures eco-friendly disposable products for the food service industry, is seen as a state loan guarantee success story.

Founder Anthony Russo recalled that he was turned down by “bank after bank after bank.” But two years ago, he landed a loan in the form of a line of working capital through the state program.

Business at the company has prospered, and Russo said he has been able to double the size of the loan three times in the last 18 months. He expects to graduate to a standard, non-guaranteed business loan this summer.

“That was seed money that allowed us to expand and actually turn this into a very good business,” he said.

Under the program, borrowers typically pay a fee of up to 2% of the guaranteed portion of a loan. Guarantees can cover up to 90% of the value of the loan but can’t exceed $500,000.

Loan defaults are few but rising, and the losses have also eaten away at the $31-million trust fund that backs the loan guarantees. If a loan defaults, the lender collects the guaranteed portion from the trust fund.

Scott Flores, who launched Empire Parking Lot Services in Orange last summer when his former employer closed, is hoping his application for a line of credit under the state program will be approved soon.

The new parking lot repair, painting and maintenance company is too small and new to qualify for credit with suppliers that want cash upfront, he said.

A loan partially guaranteed by the state can help start-ups like his survive, said Flores, who employs seven people: “It will enable us to get through these difficult times.”

smallbiz@latimes.com