New SBA program to open up revolving credit lines.

Federal guarantees to encourage asset-based lending 

Southland banks will be more likely than ever to issue revolving lines of credi to small businesses under a program recently introduced by the U.S. Small Business Administration, Los Angeles-area lenders said.

In July the SBA, for the first time, began to guarantee revolving lines of credit that SBA lenders issue to small businesses in which accounts receivables and inventories are used as collateral. This is called asset-based lending.

The SBA guarantees will encourage L.A. County banks to make loans to small businesses that wouldn't otherwise qualify for asset-based revolving lines of credit because they are considered too risky, lenders said.

The SBA guarantees 75 percent of the loan amount or $750,000, whichever is less and the loan can be made for a period of up to five years. For most such loans, the interest rate is the prime rate plus 2.25 percent.

The lender cannot lend against more than 80 percent of the value of the small business' accounts receivables or 50 percent of the value of the inventory, according to the SBA. The eligibility requirements for the borrowing small businesses are the same as those for conventional SBA loans.

As of press time, lenders were still getting the new program up and running, an no loans had yet been made.

Encino-based California United Bank already specializes in asset-based lending, but most of its current loans range in size from about $1.5 million to $4 million, said John Callos, senior vice president and SBA department manager.

However the new SBA program is geared for loans of $1 million or less. "This program allows us to help those companies that normally fall out of the parameters of normal commercial loans," Callos said.

For instance, California United typically lends to companies that have been in business at least three years. But with the SBA guarantee, the bank might make loans to companies with less than three years under their belts, he said.

Or certain companies may already have too much debt to qualify for a conventional loan, Callos said. But with the new guarantee, California United may loan to them, he said.

Also at California United, the bankers usually aren't comfortable making loans for more than 25 percent of the value of the businesses' inventory. But with th guarantee, the bank might loan up to 45 percent of the inventory's value, Callo said.

The new SBA program also offers small businesses an alternative to their more frequent sources of financing, which include factors, commercial finance companies and business credit firms, Callos said.

Factors buy companies' accounts receivables and service the collections themselves. They are expensive because they buy the receivables at steep discounts, Callos said.

Furthermore, factors usually make commitments for only one year at a time, whil the SBA loans are good for up to five years, he said.

Commercial finance companies and business credit firms, meanwhile, typically charge high interest rates, Callos said. In contrast, the SBA's rate of 2.25 percent above prime is "a very fair rate," he said.

In addition, commercial finance companies and business credit firms generally require real estate as collateral, while the lenders making the new type of SBA loans don't, Callos said.

A few Southland banks already have potential borrowers for the new SBA loans lined up. California United has six potential borrowers for a potential total o $2.2 million worth of loans, Callos said.

Beverly Hills-based City National Bank has four prospective borrowers, said Kristine Chung, vice president and manager of the bank's government lending division. City National currently provides asset-based lending to companies tha need $1 million or more.

Chatsworth-based Sirco -- which reconstructs buildings damaged by earthquakes, fires or floods -- is applying for such a loan with City National, said Sirco spokesman Mark Marcus.

The company receives contracts, typically from insurance companies, to perform specific jobs. It then needs to borrow money to buy materials to make the building repairs because the insurance companies typically either pay Sirco in small increments or not until after the job is completed, Marcus said.