Big Lender

For 13 years, Roberto Barragan has been, perhaps, the best friend a small business owner can have. The president and CEO of the Valley Economic Development Center leads the nonprofit on its mission to get money into the hands of business owners when the national or regional banks turn them down. Today, Barragan says, that’s all too often. The organization is loaning on average between $1 million and $1.5 million per month. “Small business is my passion,” said Barragan, 52. Recruited for the VEDC in 1995, Barragan started out leading a business assistance program in the east San Fernando Valley and later became the organization’s first director of lending. He took on his current role in 1999. The VEDC has grown to become the largest nonprofit business development corporation in the greater Los Angeles area with five area locations and another in Oakland. It offers direct micro- and small-business loans as well as SBA 7(a) and SBA 504 loans. The nonprofit has a $20 million loan portfolio and almost $40 million under management, and it originates loans totaling more than $35 million annually to businesses locally and statewide. With the help of a $5 million grant received in 2010 from JPMorgan Chase, Barragan is rolling out the group’s lending formula statewide. And he’s also working to find ways that the organization can be helpful to other lenders nationwide. “We have an opportunity to grow this and become a national expert on what it is to do transition lending,” Barragan said. A father of three, Barragan enjoys spending time with his family and golfing. He also serves on the board of California United Bank. Question: How is the lending environment? Answer: Tough, very tough. The Federal Reserve came out with a survey (in August) that said underwriting criteria for large- and medium-sized business was easing up but that for small business it was still a tight lending environment. Q: Why is that? A: Banks are still being cautious about small business lending. Examiners are still being very critical with banks over small business lending. The challenge is you have the (Obama) Administration and the politicians saying one thing — more small business lending. And on the other hand, the examiners are looking at a loan the bank makes and saying, ‘We don’t like the cash flow of that business.’ Banks are saying, ‘I cannot afford the examiner’s scrutiny. I cannot afford to put the loan on my book, and I’m not going to make the loan.’ Q: Do the large banks send business your way? A: Every one of them. Fifty percent of the loans we are doing right now are bank referrals. My best source of small business loans are the banks themselves. Q: What financial resources are available for small businesses? A: Us. Right now VEDC has just closed $21 million between Goldman Sachs’ 10,000 Small Businesses program and UBS (a Swiss bank) in Los Angeles. We have a significant amount of capital. I spend most of my time these days raising capital. We are lending at $1 million to $1.5 million per month. It has been a constant race to continue to meet the needs of small business. Fortunately, Goldman Sachs and UBS make it possible for me to have enough capital to meet at least L.A.’s needs for the near future. Q: Why do you think the VEDC has been able to attract such funds? A: We have developed a formula for doing (lending) that is entrepreneurial in character. We call it entrepreneurial underwriting. Find a way to do the loan, but also find a way to make sure you’re getting paid back. It’s proven out. Last year, we wrote off 1.1 percent out of our entire loan portfolio. That’s better than most banks. We have been underwriting to the ‘nth degree. We make sure there is an exit strategy if something goes wrong. We understand the business model and the operator. We know who we lend to. Q: Are lenders taking more risks? A: No, not with small businesses. They cannot afford to. Do they need to in terms of the economy? Yes. Do I wish they were doing more SBA lending, which mitigates that risk? Yes. Some of the banks that have left the (SBA) market — like Bank of America — they are still going through their own challenges. I’m hoping that in the next year, two years, they come back and are able to do the kind of number of loans that we saw in the past. Q: Where does the VEDC do most of its business? A: Right now about two-thirds of it is here in L.A. That number is slowly decreasing. Not because demand is decreasing but because demand is increasing elsewhere. Q: How much of the business is here in the San Fernando Valley? A: Probably about 20 percent to 25 percent of the total loans are being done in the Valley. This is still pretty good. People know us very well. Q: What have been your most proud accomplishments as president and CEO? A: This building (in Sherman Oaks.) I tell people it was probably the smartest thing I’ve done as president. Even with the decreasing commercial real estate values it’s still worth almost twice as much as when we bought it back in 2001. The second thing is probably the Pacoima Development Credit Union. Founding that was kind of a labor love. People see it as an institution that’s important to serve the under-banked. People use it as an alternative to check cashers. And then, finally, what we are doing right now. We’re creating a statewide small business lending operation that is now a $35 million balance sheet. Q: Do you foresee a time when the work the VEDC does will be considered a national model? A: That is what we are pursuing right now. We just opened up a loan fund in Chicago — a $2 million loan fund funded by UBS. I have a former VEDC employee hired as a consultant vetting loan applications. We are working with a group in New York, also funded by UBS, to help them transition them from micro-loans to small business lending. We just got approval from Wells Fargo Bank to expand our Where’s the Money event to Las Vegas. We are increasingly being asked to play an advisory role, support role for small business activities in other parts of the country. Q: How much longer do you envision yourself as the VEDC president? A: After the Chase grant came along (in 2010) I said, ‘This is a huge accomplishment for us.’ We established a three year plan to grow to $50 million. I am going to be the one to implement that plan. After that, I don’t know. The board’s support of a national strategy is exciting and important. As long as my board supports me and continues to support, in part, a vision I’m excited about, I’m going to be around. Q: Is there a succession plan in place? A: We went through a program to upgrade and professionalize the organization. We’ve gone through reorganization here. We’ve gone through a lot of strategic planning. We have three Vice Presidents now, two of which easily could be my replacement. Our new VP structure provides for that succession planning. Q: If the opportunity came along to move to a national position to assist small businesses would you take it? A: If someone wants to offer me the SBA Administrator job, I’ll take it any day. There are two dream jobs that I have. One is the SBA Administrator’s job. The other job is deputy mayor for economic development for the City of Los Angeles. I’ve said enough about economic development in the city that I’d like to be the one to come up with a development strategy. Q: How have the relationships with the large, national banks developed? A: It started back in 1999. Before I became president, the VEDC had no bank support. In 1999, I reached out to friends at Wells Fargo and said, ‘I am the new president here. Can you work with me?’ Wells Fargo stepped up and said, ‘We’ll be your partner.’ I went to City National (Bank) and said, ‘You’ve been our bank of record for years, and I need you to be our financial partner.’ We’ve been a long-time partner with Bank of America in micro-lending. In 2002, they provided us $200,000 to take our micro-lending program from nothing to the fifth-largest in the country, and have continued to provide the critical support to us. When Wachovia came into California and bought World Savings they enabled us to go statewide with our Where’s the Money event. When Wells Fargo bought Wachovia, Wells Fargo continued (sponsoring the event). Q: What about community banks? Do you think there will be further consolidation among those size banks? A: Because of the fallout from the financial crisis, because of Dodd-Frank in part, because of Basel 3 that will provide for higher capital requirements, any bank under $500 million in assets will find it very difficult to survive. You are going to see further consolidation. The ones that survived the financial growth will either grow organically or acquire, and those that cannot hit the $500 million, they will be looking to be acquired. Community banks are extremely important in terms of being the on-the-street institutions that serve small business. They are stressed. Q: What are your thoughts on the state of the economy? A: Economists will to tell you that a recovery is, in part, a function of small business growth and homeownership. We are not going to see a true recovery in L.A., much less California, until we see some return to normal on homeownership and get past the foreclosure crisis and until small business becomes the leading edge of recovery and creates jobs. Neither is happening right now. As much capital as I can lend, I’m not a blip on the scene in terms of all small business needs. We need to look for continuing solutions to that. On the federal level, SBA needs to do that much more — providing support to banks to do more small business lending. Q: What is your golf handicap? A: I don’t have a golf handicap. I play golf. I am not a golfer. I enjoy it for the opportunity of beer, cigars and friends. For the longest time I made fun of golf. But then I played golf in Cancun about four years ago and it bit me. It’s a good break from what I do here. When you play golf and play it decently you have to concentrate. You can’t be thinking about the next event or the next loan you have to make. You have to think about which club I use to get to the green.