Outlets for small business loans all but disappear.

Once thriving industry wilts under new regulations

State-licensed corporations that exist solely to lend money to small businesses have all but disappeared from California.

A state law passed in 1978 enabled startups of business and industrial development corporations, or "bidcos."

Throughout the 1980s about a dozen such bidcos operated in California, licensed by the state to dole out Small Business Administration-guaranteed loans. The bidcos were overseen by the state banking department.

Unlike conventional banks, the bidcos weren't allowed to accept deposits but had to raise money by other private means.

The amount of financing bidcos could provide was limited to what they could raise privately until the secondary financial market developed during the mid-1980s.

Then bidcos were able to sell the loans they made to insurance companies or other financial institutions in the secondary market and use the proceeds to make more loans.

A typical bidco could transform $1.5 million in private financing into $10 million in loans to small businesses by recycling the money in the secondary market, said Arthur Sweet president of Canoga Park-based Certified Business Funding bidco.

Until the late 1980s the SBA guaranteed 90 percent of each loan the bidcos made, but then reduced that amount to 85 percent, said Robert Coleman, chief operating officer of Government Funding California Business & Industrial Development Corp.

Now the bidcos were required to cover more of each loan with their own capital. Many couldn't handle the burden and consequently folded, Coleman said.

Furthermore, some bidco owners found that by the time they had funded their company's startup costs and gotten the operation off the ground, they had little money remaining to lend, said Jack Mattimoe, assistant regional administrator for finance and investment at the SBA.

Other bidcos sold loans into the secondary market until they reached a limit and had no more funds to circulate, Sweet said.

The bidcos were required to keep from 10 to 15 percent of each loan sold to the secondary market to offset the portion the SBA wasn't guaranteeing.

After awhile, the funds ran out, he explained. Sweet's company, Certified Business Funding, was one of these bidcos.

Hollywood-based Government Funding was able to absorb the SBA's loan guarantee reduction and is the last bidco in California still actively lending.

The company has a $250 million loan portfolio, lent $95 million to small businesses during 1991 and will probably loan $120 million during all of 1992, Coleman said.

It operates 10 offices throughout California.

Government Funding "has been able to make quality loans in a tough environment," Coleman gave as reason for the company's success.

He added that the bidco's profitability compares favorably with that of successful banks and other financial institutions.

The dozen or so bidcos that used to exist in California operated in a key niche that banks don't fill, Sweet said.

Bidcos tailor more to the specific needs of small businesses, are willing to make loans that banks won't approve, and are more inclined to make loans in general, he said.

Most banks are more interested in making large commercial loans than ones to small businesses, Sweet said.

Also, while banks rely almost solely on a small-business owner's assets to determine loan approval, bidcos place much more emphasis on the owner's track record and management ability, Sweet said.

But bidco loans typically were reliable. Eighty percent of the loans Certified Business Funding made were repaid on schedule.

The other 20 percent was taken care of by liquidating the small business, restructuring it, or working out another arrangement, Sweet added.

Also, banks want an SBA-guaranteed loan to be fully collateralized, usually with real estate, but bidcos typically don't make that a requirement, he added.

Likewise, bidcos finance startup companies, inventories, lines of credit and equipment, none of which most banks will finance, Sweet said.

But Mattmoe disagreed with Sweet. The bidcos don't fill any niche not satisfied by other SBA lenders, he said.