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Loan funds feel cash squeeze

Access to capital is a major hurdle facing certified community development financial institutions and prospective borrowers through the program run by the Treasury Department.

November 24, 2009|By Cyndia Zwahlen

Saul Gamboa was ready to break ground on a 44,000-square-foot plant in Vernon for his growing small business, Pacific Commercial Truck Body Inc., when he realized he'd missed a key deadline and lost his construction loan.

A chance flier in the mail two days later saved the project, he said.

It was from Telacu Community Capital, a nonprofit lender in Los Angeles, advertising loans for small businesses in low- to moderate-income areas that don't meet the lending criteria of commercial banks. Gamboa landed an $800,000 loan from the lender, a certified community development financial institution. He built the plant, doubled his workforce to 15 and hit sales of $1 million in 2007.

The federal government is hoping to help more small businesses such as Gamboa's by boosting loans available through its previously low-profile, certified community development financial institutions program.

But the process is cumbersome, and using the CDFI program to quickly get more money into the hands of small businesses will be difficult.

The program, which is run by the Treasury Department, awards grants and makes loans to banks and other lenders in the program that compete for its limited pool of capital to invest in areas underserved by conventional financial services.

There are about 800 community development financial institutions nationwide, including 76 in California. They get their money from various sources, public and private.

The larger organizations typically make loans for projects such as low-income housing. Smaller ones often focus on small-business lending.

Some are chartered as banks and would be eligible to receive federal economic stimulus funds in exchange for making more small-business loans under a proposal endorsed by President Obama. Under that proposal, CDFIs that are banks would pay 2% interest to use money from the TARP program to make loans to small businesses.

Other CDFIs are loan funds of various types. Because these entities aren't banks, they don't have the regulatory structure in place to access TARP funds.

There are a variety of proposals to find ways to get them more capital, but there are no easy answers. Most get the money they lend from a variety of sources, including traditional banks, which have tightened their purse strings lately. Grants and loans from the government also are hard to get: Only a handful of CDFIs in California were among the recipients announced this fall.

Dan Sieu, executive director of the Asian Pacific Revolving Loan Fund of L.A., said his fund is caught in the credit crunch. In the past, it received money from banks to lend to small firms that weren't ready for a conventional bank loan. He and his team would help the firms clean up their financial acts, then lend them money, often around $250,000.

At a certain point, the firms were able to take out a conventional bank loan and repay the fund, freeing up the money to be lent to other small businesses.

Now, Sieu said, few banks are willing to work with the program. "Hardly any money is hitting the streets," he said.

California Coastal Rural Development Corp., a CDFI based in Salinas that makes loans to rural businesses and family farms, wouldn't qualify for the 2% TARP loans. And its application for a $2-million CDFI grant was turned down last month.

"We would have been able to make another $20 million in loans" with that money, said Herb Aarons, president of the organization that serves Ventura and six other counties. "I've got a letter from 20 small Latino farmers in Santa Maria that I just can't fund. It's been a bad year."

But even if CDFI loan funds get a new line on capital, there's no guarantee they could immediately increase small-business lending.

Richard C. Duarte, executive director of Los Angeles-based Telacu Community Capital, said he has money to lend but is having a tough time finding qualified buyers.

"It's like finding a needle in a haystack," said the former banker who oversees $8 million divided among three lending funds, including one geared to microloans of $5,000 to $35,000.

Small businesses that previously could have qualified for a conventional bank loan are showing up at the organization. But they are a small percentage of the growing number of applicants. The larger group Duarte's hearing from are deeply troubled firms desperate for cash.

"It's unfortunate, but those are the people we probably don't want to lend to because they are close to closing their doors," he said.

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