State starts program to guarantee souring biz loans

churchhillinsidebankGovernor Tim Kaine has authorized the state to guarantee a total of $3 million in existing small business loans for Virginia businesses.

The Virginia Small Business Financing Authority quickly approved a new program to work with banks and guarantee existing loans of up to $500,000 on the condition that banks loosen some of the terms of the loans. It was announced at the end of last week.

“By offering a guarantee, we’re hoping that the troubled loan [improves], and the business has a better chance of surviving by allowing them to have some additional time,” said Scott Parsons, the executive director of the Virginia Small Business Financing Authority, which is a division of the Virginia Department of Business Assistance.

The loans must go to protect jobs in Virginia that pay at least $10 an hour.

“If banks are willing to restructure loans such that they can give a business an additional year to the terms, or refinance to give the business some better cash flow, or give them an interest-only period. That ads risk to the bank,” Parsons explained. “In order to alleviate that risk, we would allow them to enroll in a guarantee program.”

As the economy slows, businesses around the state are getting squeezed by lower sales on the one hand, and banks that want more collateral on the other. In some cases banks are reducing lines of credit or calling loans. The credit crunch is particularly devastating for seasonal businesses that rely on lines of credit to hold them over until their busy seasons.

This is the first time it has guaranteed existing loans. From July 2007 through June 2008, the authority guaranteed 145 new loans. For existing loans, the SBFA will review the terms and determine if it’s worth guaranteeing. The process will likely take at least 30 days, according to the authority. Businesses in struggling industries, such as construction, are unlikely to receive loan guarantees, according to Parsons, because the state does not want to lose money on loans that are high risk.

“We have to look at each situation individually. If a bank is willing to extend terms, we may look at it and with additional time, it improves the business cash flow, or with the lower interest rate and more time, the business is able to pull out of it.”

Roy Terry, a bankruptcy attorney with the firm Durrette Bradshaw, said that easing the terms of a loan is similar to what happens in Chapter 11 bankruptcy filings. “This is throwing a lifeline to a business and saying ‘here’s an opportunity to work out a problem loan outside of bankruptcy,’ which saves time and money,” Terry said.

But the $3 million might not stretch that far. If the SBFA guaranteed loans of $100,000, it could only cover 30 businesses. And it’s unclear how many jobs might be saved.

Any further action to guarantee more loans would likely require legislative action, Parsons said. That could be difficult with a General Assembly that isn’t eager to raise taxes.

Parsons’ advice to business owners: if the terms of a loan are becoming burdensome, business owners/managers should first call their bankers. Then, they can call 371-8254 or their local small business development center to see if the loan guarantee might work.

Look for a story tomorrow on what local agencies are doing to help struggling business.
Please send story ideas or [email protected] Aaron Kremer is the BizSense editor.

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