Small businesses in the San Gabriel Valley will soon have another source of potential financing.
Nineteen local banks are putting the final touches on the San Gabriel Valley Community Development Corp., a joint-venture lending company that will offer loans to small companies that are unable to qualify for traditional bank loans due to their short, or troubled, credit histories.
“They are the bottom of the entrepreneurial food chain,” said Parker Williams, senior business development officer at EastWest Bank in San Marino, who will act as president of the CDC. “They have vision, but have not yet proved themselves. This is a market that the individual banks wouldn’t and couldn’t touch.”
Banks, in turn, can improve their standing with federal regulators by putting money into the CDC.
Under the federal Community Reinvestment Act of 1977, banks are required to direct a portion of their loan activity to poorer communities in the geographic areas they serve.
Each bank is given a CRA rating by the federal government based on those commitments. If it has a low rating, the bank may have difficulty receiving government approval for the opening of new branches and mergers and acquisitions.
The banks that have so far made the biggest contributions to the CDC are EastWest Bank, United National Bank, Cathay Bancorp Inc., Foothill Independent Bancorp, Community Bank and CenFed Bank.
Though the group has yet to publicize itself, there are 15 applicants already on the waiting list, said W. Chris Broquist, president of South Pasadena-based business consulting firm Summit Group, which will manage the daily operation of the CDC. While the banks will provide the funding and make all loan decisions, Summit Group will handle the day-to-day operations of the CDC, including marketing, packaging and marketing the loans.
The first loans should be made within the next three months, Williams said. The group has already received approval from the FDIC, but is now awaiting a license from the California Department of Corporations.
The CDC has been structured as a for-profit company and is expected to make money in its third year. Of possibly greater value to the participating banks will be the Community Reinvestment Act credits they will receive for their involvement.
Each year, banks are quizzed by the federal government to determine whether they are reinvesting enough into the communities in which they are based.
In past years, some of the banks serving the Chinese American business community in the San Gabriel Valley have been criticized for not investing enough in poorer neighborhoods.
Participation in the CDC is expected to alleviate some of the criticism.
“Banks are in a difficult position. If their small-business loans fall through, they get into trouble with bank regulators,” Williams said. “But if they don’t make the loans, they get into trouble with the CRA.”
The San Gabriel Valley group is the latest in a string of community development corporations to spring up across Southern California in the 1990s.
Since the San Diego Community Development Corp. was started in 1991, similar organizations have been established in Orange, San Bernardino and Riverside counties.
Lee Fenn, senior vice president at Republic Bank in Torrance, who helped set up the other CDCs and is acting as a technical advisor for the San Gabriel Valley group, said there are currently no plans to set up a similar organization in the city of Los Angeles. A lack of community banks in the city is the primary reason, he said.
The large banks, meanwhile, have not shown much willingness to participate in such groups, he said.
“The big banks like to make a big splash about the huge dollar amounts they are making available, but they rarely follow up to make sure the money gets to the community.”
The San Gabriel group will focus on offering loans of under $50,000, with most being in the $25,000 to $30,000 range, Williams said. A typical loan will have a term of five years and carry a fixed interest rate of 3 or 4 percentage points over the prime rate.
At its initiation, the CDC will have a loan pool of $1.5 million, which can be replenished by cash contributions from the participating banks when needed.
While any small business that meets the group’s criteria can qualify for a loan, Parker said the CDC’s marketing efforts will be designed to attracting minority and women business owners.