City Denies Business Loans, Despite $15 million Pot

A $15 million city of Los Angeles small business loan program has made very little progress on its lending and job creation goals. Since the Los Angeles Citywide Small Business Loan Program was announced in 2009, the city has received 88 applications for the funds and has approved two of those loan applications, said Robert Sainz, assistant general for the Community Development Department. The approved loans have a combined total of $533,000, he said. Powerline Control Systems of Northridge was one of the two loan recipients. But 34 companies in the greater San Fernando Valley region were turned down, largely for failing to meet certain financial criteria, or voluntarily withdrew their applications. City documents obtained by the San Fernando Valley Business Journal combine into one list the companies that were turned down for loans and those that withdrew their application. Among the companies listed: gaming table supplier U.S. Gaming Supply in Pacoima, startup restaurant Phil’s Diner in North Hollywood, stone and tile distributor Stoneville in North Hollywood and motion picture camera accessory manufacturer Camera Accessory Solutions. The loan program, designed to help small businesses fund job growth, is funded through a line of credit the city secured with the U.S. Department of Housing and Urban Development. The program is administered by the Los Angeles Community Development Department and its contracted liaison and lending partner, the Valley Economic Development Center, a Sherman Oaks-based nonprofit agency. Officials with the city and the VEDC say they have different interpretations of the collateral requirements and other standards loan applicants must satisfy in order to qualify for program funds. They also disagree about how businesses can use the funds. Collin Colberg, owner of Camera Accessory Solutions in Van Nuys, said he turned to the city for a loan to buy machinery. The experience turned out to be stressful, with the city asking for a lot of financial documentation, he said. “They made it all seem unattractive and not very easy,” Colberg said. “They created a lot of hoops for me to jump through.” After considerable hassle, Colberg said he was offered $20,000, which he then turned down. In the end, he said he purchased the machinery with a loan from the manufacturer and at terms better than what the city offered. Rejected loan applications Of the 88 submitted loan applications from throughout the city, 20 were withdrawn or were not fully completed, Sainz said. The remaining 68 applications were rejected because the companies did not meet the loan criteria established by HUD, or had a poor credit rating, he said. The city has the final say on which companies receive loans. “There were a number of loans we declined because we didn’t think they met the credit underwriting,” Sainz said. And some of the businesses that applied for loans were losing money and sought a cash infusion to keep afloat. “We did not want to invest in high risk businesses,” Sainz said. The city contracted the VEDC to provide the loans to businesses over a 20 year period. The center screens and processes the application, does the underwriting and confirms that the businesses receiving the money comply with the loan program’s job creation criteria. Businesses have a five year period after receiving the loan to make new hires. According to the contract between the city and the VEDC, the program would create 429 full-time jobs, if all funds were allocated. Fifty one percent of those jobs would be made available to low- and moderate-income persons, the contract states. The VEDC has expressed to city officials its disappointment in the lack of progress with the program, said VEDC President Roberto Barragan. Barragan steered clear of pointed criticism of the city and the community development department. However, he said, part of the problem is the city lacks the expertise required to lend to small businesses. “The program (criteria) is very clear,” Barragan said, “but it does not meet the needs of small business or the realities of small business.” There are four loan applications currently in the pipeline at the VEDC, according to the agency. The applications meet the underwriting requirements but not the use of funds criteria set by the city, the agency said. The VEDC receives funding from other sources for its lending programs and found alternative money for businesses that were rejected in the city loan program. Out of the 68 rejected applications, the center provided 12 loans totaling $3 million through the Goldman Sachs 10,000 Small Business program; four loans totaling $1 million through the Chase Small Business California program; and 20 loans totaling $5 million through Wells Fargo Bank, the U.S. Commerce Department, and California United Bank. Meeting the criteria When Los Angeles Mayor Antonio Villaraigosa announced the loan program in September 2009, it was at a press conference held at Powerline Control Systems’s headquarters in Northridge. Powerline, a maker of energy-efficient lighting control systems, received a $450,000 loan and has used the full amount. Powerline CEO Marshall Lester said securing the funds was a frustrating experience. Disagreements between the company and the VEDC over the lending agreement and certain terms put their relationship on the rocks, those involved said. The city’s economic development division eventually stepped in with a direct loan for Powerline, Lester said. “If they had not done that, we would have gone from a company of 15 years to being bankrupt,” he said. Universal Art Gallery Inc., located in Venice, was the second application the city approved. The company was approved for a $260,000 loan, though it has received about $83,000. Universal Art Gallery owner Lucas da Silva said he had a positive experience with the loan program. While the company only received part of the loan money that was approved, da Silva said he hired two new employees this year. He said city guidelines prevented him from using the loan money to build up his inventory. “If I had gotten all the money, I could have done more, hired more,” da Silva said. Businesses that have filed applications all have been existing businesses, Barragan said. They included manufacturing companies, restaurants, a day spa, retailers and contractors. All were pre-screened and projected job creation, he said. The sticking point for many of the applicants was the collateral requirement, Barragan said. He characterized the city’s collateral requirement as being more “significant” than what the VEDC requires in its other small business loan programs. The contract between the city and the lender spells out that collateral would include accounts receivables, inventories and assets such as real estate and equipment. In other lending, the VEDC has no restrictions on how loans can be used and the collateral amount asked for would pay back the loan in the event of a default, Barragan said. “Collateral itself is not a reason to reject (an application). We will make a loan if there is good credit and cash flow,” Barragan added. “The city program does not allow for that.” “The other issue that has been problematic is the use of proceeds,” Barragan added. “What business needs is working capital, and the city will not allow for working capital (from those loans).” Since the money comes to the city from the federal government, the city is restricted in how it can be spent, Sainz said. The criteria used for the small business loan program is based on HUD regulations, he said. “The flexibility we have with the money is not as great as if it was from the city general fund,” Sainz said. Future program Disagreements between the VEDC and the community development department extend to how the loan program can be modified so that the money can be accessed. In a March 2011 letter to CDD General Manger Richard Benbow, Barragan proposed the VEDC run the program and put up $1 million of its own money to cover any losses from the loans. The center would loosen the loan criteria to get more businesses involved and still stay within the regulations set by HUD, Barragan said. “I am not going to be doing risky transactions with money I am on the hook for,” Barragan said. Barragan said he never heard a response back from the city. That proposal, Sainz said, was incompatible with the city’s agreement with HUD on how the loan program would be administered. But the letter did spur thinking in the department on how to reorganize the program, he said. The city’s proposal is to set up six small business assistance centers throughout the city. Two would be located in the San Fernando Valley. Staff at these centers would help in pre-packaging the applications to make sure they include the right information and expand the pool of qualified businesses, Sainz said. Banks would also be involved as advisors on the loan process and the city will invest in staff training to understand the application criteria. “If they are eligible for our funding then they move through the pipeline more efficiently,” Sainz said. Setting up the six centers is still moving through the city approval processes. The VEDC is one of the organizations that submitted a proposal to operate one of the centers, Sainz said.