For loans, uncles may beat Uncle Sam

For Cassandra Cooper and Rewa Scott, getting a bank credit line backed by the Small Business Administration was a welcome infusion for their temporary-employee firm.

Then disaster struck. The company lost its biggest client, and the bank, California Bank & Trust, wouldn't budge when it came to reworking the credit line for Scott & Cooper Staffing Solutions.

The San Diego-based bank wanted Cooper, the staffing agency's chief executive, to sell her Burbank house, refinance her mortgage or get a second home loan to pay off the debt. Although the SBA had guaranteed the loan, the bank claimed that Cooper's personal assets were collateral.

The dispute, eventually settled by a jury in Cooper's favor, provides a sobering lesson about SBA loans: Although the government guarantees 50% to 85% of the debt, it is the last stop, not the first, when banks go about collecting on a defaulted loan.

"You understand that if something happens and you can't pay your bills, the SBA will be your backup," Cooper said. "And it's just the opposite."

California Bank & Trust and its parent company, Salt Lake City-based Zions Bancorporation, declined to discuss the case. The bank's attorney called the verdict "aberrant."

That's one reason entrepreneurs leery of risking personal assets for an SBA-backed loan should explore other financing options, including traditional bank loans. But even those are hard to get without providing collateral of some sort, experts say.

A more promising method is tapping the assets of friends and family. SBA-sponsored studies have concluded that the majority of funding for businesses with fewer than 20 employees comes from such "informal capital," said David A. Walker, a Georgetown University business professor.

Growing companies with four or five years of solid profitability might be able to tap into receivables financing (selling unpaid bills at a discount to an outside company that specializes in collections), said Michael D. Ames, executive director of the Center for Entrepreneurship at Cal State Fullerton.

Some entrepreneurs also obtain funding from suppliers and customers that believe in the business' model, Ames said, or from early-stage venture capitalists: "angel" investors specializing in start-up enterprises.

SBA-guaranteed loans are especially attractive, however, because minimum standards for borrowers are generally lower than on conventional bank loans and because SBA loans have longer repayment periods.