“The guarantee
program is stronger than ever.”
— George McDaniel, Nor-Cal FDC consultant
OAKLAND, Calif. – As lenders look for ways to shore up portfolio stability following the chaos-inducing failures of Silicon Valley Bank and Signature Bank in early March, some in California are turning their attention to a long-established state program that strengthens the viability of loans made to small businesses.
On March 10, Santa Clara-based Silicon Valley Bank collapsed following a run on its deposits in the wake of losses tied to sales of devalued government bonds. The bank’s sudden demise triggered a panic run at Signature, a similar mid-sized bank based in New York which regulators seized on March 12. Shares also plummeted at First Republic Bank which subsequently received a massive infusion from an 11-bank rescue effort. Ensuing tremors rippled throughout the global finance industry which was rocked this week by the historic sale of banking conglomerate Credit Suisse Group AG.
Jittery banks are tightening their lending toward preserving cash liquidity and taking fewer risks in a heightened regulatory and emotionally frazzled climate. In California, the state’s Small Business Loan Guarantee program offered through the California Infrastructure and Economic Development Bank, or IBank is getting a closer look – the program provides lenders a method of achieving stability with an assurance that with eligible small business loans, up to a maximum 80% or $5 million of guarantee coverage can be achieved through enrollment of the loan and will be repaid in the event of default.
Northern California Financial Development Corporation (Nor-Cal FDC) in Oakland, one of seven IBank financial development corporations around the state which administer the state loan guarantee and other programs has experienced an uptick in interest from banks who want to learn more about the benefits of joining as a certified lender. With program-wide loan defaults at less than 2% and coming in under 1% for loan guarantees administered by Nor-Cal, the program has “proven its weight in gold” and is one more tool for banks to consider, said Sanford Livingston, Nor-Cal’s president and chief executive officer. Livingston is also vice president of The Association of Financial Development Corporations, an umbrella advocacy organization for the seven agencies.
“The guarantee program is strong, stronger than ever. The [present] circumstances make it even more compelling,” noted George McDaniel, green energy consultant at Nor-Cal.
The current crisis involving Silicon Valley Bank had little impact on loans secured by state loan guarantees at Nor-Cal and elsewhere–only three such loans deals were held by Silicon Valley Bank and had originated with Boston Private Bank and Trust which was previously acquired by SVB.
The total amount guaranteed and active is roughly $1 million, McDaniel said. “We’re very thankful that we’re relatively unaffected on a statewide basis by this tragic event.” Currently, federal regulator-created bridge banks have been established to hold assets of both Silicon Valley and Signature banks.
In the event of a bank closure, any state-guaranteed loans could also remain serviced by the original lender if the entity is a certified Community Development Financial Institution that is required to assist underserved communities and business owners and that keeps 10% of its loan portfolio in an asset sale.
“From a guarantee standpoint, the liability is pretty nil,” Livingston said.
The bigger impact of the bank collapse will be with IBank’s new climate tech financing program, noted Livingston. Reports indicate that Silicon Valley Bank was a leading funder of climate startups including those that develop solar and carbon removal projects.
California’s Small Business Loan Guarantee was initiated in 1968, 10 years before Nor-Cal was established. During fiscal 2021-22, IBank guaranteed 1,107 small business loans with $278 million in loans supported by the program and 438,000 jobs in FY 2021 created or retained. Last fall, the state announced the approval of $1.1 billion in funds from the U.S. Treasury’s State Small Business Credit Initiative (SSBCI). Half of the award has been issued to IBank, bolstering its credit support programs, in particular the state loan guarantee program.
Small and medium-sized banks hold a significant stake in the national economy, and small businesses to whom these banks issue loans account for 44% of the nation’s economic activity. In California, 99.8% of all businesses are small businesses, underscoring the importance of programs that strengthen this foundational sector of the economy, particularly those businesses that are most vulnerable and operating outside of the economic mainstream, says Michael A. Ocasio, president and chief executive officer of Small Business Development Corporation of Orange County. Ocasio is also president of The Association of Financial Development Corporations. His Orange County corporation experienced no impact from the bank collapses.
“The state’s loan guarantee program is a best-kept secret that we would like to reveal more fully to the lending industry, especially during these troubled financial times,” Ocasio said. “Participation in this program is a win-win for all parties – the lender who needs stability, and the small business owner who needs capital to grow and add to the economy. This current banking crisis holds a silver lining in that it provides an opportunity for more decision makers to learn about this important and useful program.”
The state loan guarantee is unique to California but has garnered recent interest from other states as the country emerges from the ravages of the COVID-19 pandemic. In February officials from Minnesota visited California and expressed interest in replicating the loan guarantee program their state, Livingston said.
“The pandemic turned the whole world upside down,” said McDaniel adding that California’s loan guarantee will probably be copied at the public or private level elsewhere in the country. “We need to be sure small businesses and farmers are given what they need to weather the storm post-pandemic,” he said.