Wednesday, January 03, 2007

Government loans to businesses

With the recent news that the City of Toledo is suing various companies that defaulted on their government loans, I thought I'd share some information about the County's situation with the former Socrates Cafe.

This Warehouse District company approached the County for a low-interest loan. The owner is a well-respected businessman but was having some difficulty with his business in this area of the city. As I always do, I asked for the analysis of the financials that should have accompanied the loan request. However, the analysis hadn't been done yet, despite this loan being slated for the agenda.

The item was held so that financial data could be gathered, to give us - i.e. me - an idea as to whether or not the loan was a good investment of public dollars.

(Now I know that there are many out there who have a basic philosophical objection to such loans in the first place - and I agree with you...But when the issue is not SHOULD we, but TO WHOM, I saw it as my duty to make sure that, if we were going to give public dollars for such purposes, we would do so in a fiscally responsible manner.)

Once the financials came in, I immediately saw that this loan had very little chance of being repaid. The business owner's own data showed the necessary sales for a break even point and the very high likelihood that such sales would not be achieved. I also asked for a valuation of the inventory to be sure that any inventory would be sufficient to cover the loan should the owner default. The only valuation received was the owner's estimate based upon purchase price - which was not enough of a guarantee for me.

When I asked why the County was considering giving money to a company which such poor prospects, a staff person told me that they were "instructed by a commissioner to help this man and his business." When I asked staff if they thought this was a good investment, they said 'no' but that it appeared the equipment was valued high enough to ensure that we'd get our money back and that they'd write into the contract that all other obligations would be subordinated to the County.

Based upon the owner's own financial analysis, I voted against the loan, but the vote was 2 to 1. Unfortunately, the owner defaulted on the loan. Just before I left, I inquired about the status of recouping the money. The loan is over 90 days late and, I believe, the business is closed. The equipment is still on site, but has not yet been liquidated. The staff sent a formal letter in September and had a conversation in December. I don't know who is following up on this issue or how long it will take for the taxpayer money to be repaid.

Moral of the story: there are institutions who are in the business of loaning money - and they aren't governments gambling with tax dollars. If a business can't get a traditional loan, perhaps there's a very good reason - and politicians ought to pay heed. Finally, if governments find themselves in the position of making such loans, the decisions ought to be based upon sound financials and good data - not on emotions and the misguided notion of "helping." Sometimes the best 'help' is to let someone fail.

10 comments:

Lisa Renee said...

It does sound as if they had some good plans but the City nor the County should be in the business of giving loans especially if there is some question as to the ability to re-pay.

-Sepp said...

Actually it sounds like another "connected" individual got some free money. Isn't that the second coffee shop to get a low / no interest loan from the public dole and fail to repay it? I know for a fact the first person was well connected and, if someone was "instructed" by a commissioner to push this through, that has the earmarks of another connected jerk. I would like to know who it was that pushed this loan through and their relationship to the person who took our money.

Maggie Thurber said...

-sepp...don't know if the business owner is 'connected' or not. I suppose some enterprising individual could go check the campaign finance reports...

But you do have a good memory - I'd forgotten about that other loan to a coffee shop pushed and supported by the same individuals.

Kurt said...

Quick question Maggie, was this loan secured by the company's equipment? I assume it was because it was a low interest loan. If it was secured, then the county can probably at least get some of that money back.

Maggie Thurber said...

Kurt - the loan was secured by the equipment, and it is likely that the County will get some, if not all, the money back.

But that's beside the point. The point we should all recognize is that it was a bad decision in the first place, regardless of whether or not a lawsuit and liquidation of assets will recoup the tax dollars. (And don't forget the unbudgeted costs of such a lawsuit and liquidation.)

bobthedad said...

My personal pet peeve about government in general is that so few of the government officials have actual experience in running a business, but they always seem to act as if they know more about it than those that do. If all the banks turned down these loan requests can it simply mean the banks just may know what they are doing? I can imagine a scenario or two where a government loan may make some sense but I doubt if most of these would have fallen into that category.

In order to balance this issue, are there examples of some govennment loans to businesses that were good for the taxpayers and if so, what made those situations so unique that traditional bank financing wasn't used?

Maggie Thurber said...

Bobthedad - there are examples where government loans have been a good idea. Most of those examples are where the owner has invested funds, a bank has provided some conventional financing and there is still a gap, which a government loan fills. These types of loans are for often for equipment purchases, are secured by the equipment and have job creation or retention requirements. Sometimes, there are government loans for infrastructure or building expansion/improvements. Again, the most common ones are for gap financing where the individual and a bank are already involved.

The riskiest type of loan is for working capital or cash flow problems, like for Socrates Cafe.

But you're right about elected officials who've never run a business making such decisions.

Do said...

Government loans, by and large, hold the potential to be a good thing. BUT - if a business plan is not solid enough to warrant conventional financing then perhaps the person asking for money should be redirected to venture capital firms. Ooops! I forgot - that would require them to clean up their business plan, offer extended collateral (possibly their own homes) and be fiscally accountable to their investors.

I agree that government financing should only be used to fill a gap - and that gap should be less than 20% of the total amount required for startup. If a business plan is so inadequate that it requires total financing by government, then it becomes a risk that we (the tax payers) cannot afford to take.

Peahippo said...

There is no justification whatsoever for government making direct loans to private businesses, and that goes double for retail outlets. Like with the City Paper's Dec 13-19 reporting on the property at 519 Monroe St., these loan schemes are merely (but outrageously) corruption whereby some businessman with political connections gets free money.

The only way to fix this locally is to stop electing fiscal liberals into government. Alas, the LCC now holds a unamity of THREE fiscal liberals and I predict that they'll enact an unprecedented amount of taxation in order to prey on the fear and uncertainties that central CL residents are experiencing. Fearing the future of our unstoppable economic collapse, these three boobs will manage to pick every pocket in Lucas County more than once -- except the pockets of their yuppie buddies who will live even more lavishly on the stolen proceeds.

Hooda Thunkit said...

You were correct in asking for the information that you did and on how you voted.

It's just too bad that the other commissioners weren't as interested, before spending our money recklessly.

Let's hope that the newest commissioner is more business and financially astute and votes accordingly.

Government loans should be used to lower the requesting businesses burden (interest-wise), not to go where the professionals fear to tread. . .

Google Analytics Alternative