Getting more commercial loans funded via guaranteed lending.

Guaranteed lending is a popular option used by many commercial loan officers at banks in order to approve a transaction that otherwise wouldn't meet the banks credit parameters. The primary tool used by banks to provide guaranteed lending is the Small Business Administration (SBA). Established in 1953, the SBA has achieved their success by providing loan guarantees to financial institutions for the benefit of the small business owner. Their loan programs vary in the loan amount available, the use of proceeds and the distribution channel.

The SBA provides the bank with a guarantee on the loan which in turn minimizes the risk taken by the bank. This guarantee therefore affords the bank the opportunity to approve a transaction that doesn't meet standard bank parameters. Typical scenarios include length of time in business, lack of secondary source of repayment, or a FICO score less than the bank standard for the business owner. A guarantee offsets the additional risk on the transaction and it makes the deal more palatable for a bank to approve.

Smaller community banks however may not have the ability to do SBA loans. There is a significant amount of resources that need to be implemented by a bank in order to do SBA loans. Smaller banks may not have these resources and therefore cannot take advantage of guaranteed lending through SBA--which translates to missing out on financing some businesses that are on the cuffs of being approved but just don't quite meet the credit parameters.

The State of California developed a State Loan Guarantee Program almost 30 years ago to complement SBA lending. The State program is similar to the SBA in the workings of the guarantee. The state program is offered by 11 Financial Development Corporations across the State. In late 2001, the San Fernando Valley Financial Development Corporation (SFV-FDC) opened its doors to serve businesses and banks not just in the San Fernando Valley but its surrounding areas as well.

The SFV-FDC offers up to a $350,000 guarantee or 75% of the transaction, whichever is less. The purpose of the financing can be for any business purpose including working capital, fixed asset acquisition, and commercial real estate. The product is intended to help the first-time business borrower which is typically looking for capital in the $50,000 to $250,000 range. The business may have only existed for two years, cashflow may be tight but promising, available collateral (business and personal assets) may only cover the loan amount or the credit score may be tainted with minor derogatory items. These scenarios provide for an ideal situation were a guarantee can provide the additional security for the banks. The benefit for the bank is that it not only added a new loan on its books but it also added a new relationship to the bank.

The state loan guarantee program is not only for small, community banks; it is available to any commercial bank. Many larger banks that utilize SBA have also found ways to utilize the state program for these credit-enhanced transactions. Not everything fits within the SBA mold, so in order to find a way of booking the deal as oppose to losing it, they turn to the state program which at times may be able to do deals that don't fit the SBA model.

The SFV-FDC is in its fourth fiscal year and it this time, it has successfully booked over 100 loan guarantees totaling $10 million in guarantees. These transactions secured $20 million in new loans to local businesses.

We encourage all commercial loan officers to learn more about the State Loan Guarantee Program and the SFV-FDC. It's a great vehicle to help fund the one extra deal that you would love to have on your books but just doesn't make it without the credit-enhancement. Please "Call us before you say No!"

Vladimir Victorio is Director of Lending for the VEDC. For more information, please contact the SFV-FDC at 818/834-9860 or visit the website at www.sfvfdc.org.