HB 3116 Small Business Loan Guarantee Program

Washington State Legislative Bill

Absent reasonable bank loan rates at terms and rates comparable to large corporations due to …. (*)

This bill’s lending scope characteristic has a large range of variables to look at. Numerous small businesses with 50 or fewer employees and gross revenues of less than $5 MM in the last three years timeframe would qualify. Your next door neighbor’s gas station would qualify under this scenario. Your small grocer. Your local copy and print shop. Your yoga instructor down to your independent income tax preparer. Your automotive mechanic could get a piece of this pie as well.

The basic need is “a small business that has demonstrated a reasonable prospect of loan repayment of a small business loan.” (*) But could someone still qualify under this criteria if they are buying a business? I would say they could not. Some business lenders criteria could let this scenario qualify due to the prior owners being able to and having made small business loan repayments.

The total amount for lending is up to $300,000,000.00. Not exactly a large amount but with other qualifications this could be a smart amount.

A basic qualification besides being a small business is “unable to obtain funding from private commercial lenders on commercially reasonable terms or to qualify for federal small business administration loans”(*). Your commercial lending institutions for a better interest rate may demand a first or second mortgage on a residence. So if one does not own a house the interest rate for a small business loan could be 25 percent. Indeed a high rate. If purchasing inventory then a lower rate may be available. I would say try buying your equipment at an auction instead of buying at the commercial lending rate. During this time of economic downturn the best price available at the rate which can be afforded may be from an auction house. Besides, the word “sold” has exciting undertones to it.

Another criteria on the other end of the lending side would be a loan from the small business administration. One of the basic requirements here is equity and at least two years in business. Presumably the small business loan aspect would not be possible due to not meeting the minimum two-year need. I wonder if equity for repayment is also a demand here as well. Turned down could also mean no more funds are available for lending as well. The government does have limited funds for programs.

The loan would be guaranteed by the state. So loss of principle to the eventual banking lender would not be a problem for the bank. Here the criteria could be in cutting corners for the loan commission.

An interesting aspect of this bill is the small business could apply for debt refinancing. This part of the bill does not stimulate economic growth whatsoever. But some may argue that being able to make a profit could be stimulating the economy. No mention about what the charge for an interest rate would be or the required repayment loan period would be.

It is not a requirement for either to be able to increase jobs or to stimulate sales for the small business through greater efficiencies. Thus one could be merely upgrading equipment for smoother operations and thus qualify if previously disqualified for a loan as described above.

In guaranteeing funds available for in-house (“officers domiciled in Washington and that is independently owned and operated”)(*) and requirement of “a loan made for use exclusively in Washington”(*)

The use of debt refinancing weakens the aim of the loan in my view. If this is a refinanced loan from an earlier small business guaranteed loan then only under this criteria would I weaken and say “yes”. Otherwise debt refinancing ‘not at commercial rates’ for this loan would only benefit the eligible banking organization lender and the business owner. Stimulating business development through equipment, inventory purchases would not be achieved here. The alternative motive of stimulation of business activity is either to increase the number of jobs or to cut the number of jobs but with presumably higher paying wages for the same job. More efficiencies through equipment purchases or more effectiveness through better equipment and operations by higher skilled labor is important in today’s economic environment.

Without some other type of extra requirement, I would have to conclude the state is just exchanging dollars and gaining interest money where the return on investment is slight. Or rather the state is letting the borrower determine borrowing feasibility without contemplating increasing affectiveness or efficiencies in the business model.

After facebooking with one of the sponsors of the bill, Representative Campbell, I do understand the bill was written in a hurry because the bill submission deadline for the legislative year was imminent. In this respect, I applaud the efforts and hope the sponsors will be looking at strengthening the bill.

Perhaps a proper mix of investment grade type of small business loans (almost impossible) such as money for the portfolio mixed with real estate loans, quick-moving assets like inventory, or equipment purchased to replace old worn-out machinery for less maintenance costs, and the like could be pooled into an investment style portfolio. The state or this bill could make this as a possibility of using the state pension plan for the buyer of the pooled investment so a return on investment for the pension plan would help in reducing future pension costs for and to the state. If the state is guaranteeing payment of principle and the state has a defined benefit plan for state pensioners then the state is not loosing out on its investment but rather also eliminating the cost of default for two investment structures into one.

Or the state could sell this portfolio with a one year history behind it and get a higher interest rate return as well. The portfolio would be proven and also guaranteed. The state could make some money on the spread as well.