Steve Girard sells bagels for a living, but for a few days his future looked as twisted into knots as a pretzel.
Mr. Girard's Columbia-based group of two (soon to be three) Bagel Bin stores is caught in the middle of funding problems at the U.S. Small Business Administration, which said last week that its largest loan guarantee program has run out of money and could be shut down until October, when the federal fiscal year begins.
"Disaster, panic, ulcer," is how Mr. Girard describes what he thought when he heard of the shutdown. "Then I said, 'I've got to regroup.' "
Steve Girard epitomizes how the cutting of a traditional small-business lifeline can send small business owners scrambling to stay alive while the SBA is out of commission. Some borrowers, like him, may find short-term alternatives.
The SBA's 7-A program, which guarantees loans of up to $750,000 for small companies, ran out of cash April 28, a casualty of skyrocketing demand for loans. The program made $5.6 billion in loans in fiscal 1992, up 37 percent from the prior year, but Congress appropriated only enough money to guarantee $3.6 billion in loans this year, SBA spokesman Michael Stamler said.
Under 7-A, the SBA doesn't make loans but guarantees banks that do that it will cover any losses if a qualified entrepreneur can't pay. Most local SBA-backed loans are made by SBA's three local preferred lenders, First National Bank of Maryland, Signet Bank/Maryland and Maryland National Bank. Other SBA programs give small business owners loans directly from government money.
Charles Gaston, director of the SBA's district office in Baltimore, said about ten 7-A guarantee applications were pending in the local office when the freeze hit. Only four had been approved but were yet to be funded, he said. The office serves all of Maryland except Montgomery and Prince George's counties.
That small backlog isn't new. Even though the program has grown sharply in recent years, the Baltimore office guaranteed only 138 loans in the fiscal year that ended last September 30, Mr. Gaston said, for a total of $24.4 million. The office has approved 79 loan guarantees for $15.6 million in the months since.
The fact that the backlog is small was little comfort to Mr. Girard. After two months of paperwork, he had just gotten a loan approval from Maryland National April 23, contingent on winning an SBA guarantee. Then the guarantee program shutdown was announced April 27.
Mr. Girard had applied for an SBA guarantee because banks had given him little choice. It was either that or come up with 100 percent collateral, which he didn't have, despite his track record. He's been in the bagel business in Columbia for 11 years, opened a second Columbia store four years ago, and a commissary in Elkridge last year that allows him to make his own product instead of buying in from another bagel chain.
"For 11 years we've been more than paying our bills," he said. "[But] I don't have collateral. The assets I have are pledged on existing businesses. The banks want a dollar of collateral for a dollar of loan."
From $300,000 his first year in business, sales last year rose to $1.1 million and are up more than 20 percent so far this year (he won't discuss profits). The business sells 30,000 bagels a week. And all he wanted, he said, was a $150,000 loan to open a shop at the Enchanted Forest Shopping Center in Ellicott City.
"After 11 years and building three successful enterprises, I thought it would be a cakewalk," Mr. Girard said. In fact,construction began on the Ellicott City store while he was still applying for his loan. "We've done exceedingly well even during the recession. I thought the banks would line up."
He thought wrong. Maryland National, he said, wouldn't immediately go ahead with his loan after the program shut down. Signet stepped in and approved a bridge loan; Mr. Girard will get his money now and get the SBA guarantee when the 7-A program is back up and running.
"Without the bridge loan, I would have been in real trouble," he said. "
Signet spokeswoman Gail Sanders said Signet is trying to help customers who qualify for SBA guarantees by extending bridge loans until the SBA is in a position to make guarantees again. Maryland National Vice President Barry D. Blumberg said the bank is handling customers on a case-by-case basis and will consider bridge loans in proper cases. First National spokeswoman Carol Dunsworth said that bank is also offering bridge loans.
Another alternative may be the state Department of Economic and Employment Development, which has programs that can help entrepreneurs temporarily cut off from SBA loans, said Timothy Smoot, deputy director of the Maryland Small Business Development Financing Authority.
"We could probably accommodate additional guarantees of $17 million," he said, between now and when the SBA program gets started again.
Mr. Stamler said there's no telling how long the federal loan guarantee program will be out of business. The Clinton administration had included $141 million in its $16 billion economic stimulus package to get the 7-A program through the end of the fiscal year, but that package was killed by a filibuster in the Senate.