Delinquent loans plague state
|||Chart: Problem companies|
|||Chart: Delinquencies in Hawai'i Capital Loan Program|
By John Duchemin
Advertiser Staff Writer
More than half of the $11 million in the state's broadest business loan program is stuck in bad loans to a few businesses unwilling or unable to pay, including $1 million owed by one entrepreneur who has never made a single payment.
The problem has worsened in the past several years despite the state's efforts to clean up the debts and improve management practices that even those in charge admit are poor and outdated.
Fifty-eight percent, or $5.95 million, of the money lent to businesses by the taxpayer-financed Hawai'i Capital Loan Program was delinquent at the end of March, according to state government data requested by The Advertiser. Delinquent loans are more than 90 days overdue.
Delinquent businesses include six with loans between $300,000 and $1 million each that have not made any payments in more than a year.
On Friday, the state took the unusual step of filing a complaint against one of those businesses, Internet translating firm WorldPoint Interactive Inc., to force payment of $800,000 owed under the program. But, in general, the state has been unwilling or unable to collect, seize collateral or remove millions of dollars' worth of bad loans from its books.
State officials say that despite the high delinquency rate, the loan program is good for Hawai'i because it supports new business development. And borrowers say the loans have helped them start businesses that otherwise wouldn't have gotten off the ground or would have failed.
"I like the program in the sense that we're trying to help people who really need money, but I do not want to waste taxpayers' money," said Seiji Naya, director of the Department of Business, Economic Development and Tourism. "I can't say I'm very proud of our program. There's a lot more we have to do to improve."
Since its inception in 1963, the program has made 547 loans worth $47.6 million, most to businesses that were not able to borrow from banks or other lenders. And the program's supporters point out that it has subsisted on interest income without an appropriation of taxpayer money since 1990.
But the delinquency rate is far higher than many programs with a similar purpose. Several small-business loan programs have delinquency rates below 15 percent.
A comparable capital loan program in Washington state has a delinquency rate of about 16 percent, and one in Oregon has an 8.3 percent rate, according to loan officials in those states. The Hawai'i loan program's delinquency rate has stayed above 50 percent for the past five years.
"If my program had that rate, I'd be fired," said David Lawrence, director of the Hawai'i Community Loan Fund, a nonprofit program that gives "microloans" to small businesses and has a delinquency rate of between 10 and 15 percent. "There's no way a free-standing loan program would be viable at that level."
Direct comparisons with other programs are difficult because of differences in loan requirements, but the state's top business development official acknowledges that the Hawai'i loan program needs some dramatic improvement.
Program has problems
The high delinquency rate means state money and time tied up in bad loans. Officials have spent months at a time just trying to clean up and properly administer the loan portfolio instead of seeking new uses for the money.
Naya and other officials say the loan program has been hampered by low staffing, lack of automation, and an inferior review and approval process that has let some risky loans slip through.
Naya's department has only one loan officer to service 68 active loans about double the typical workload. Much of the program's work is done on paper. New loans, for instance, are hand-written in a ledger. And until last year, final loan approval rested with the department director, a politically appointed position that has never gone to someone with a finance background.
Final approval on larger loans now goes through a four-member panel including department director Naya; Attorney General Earl Anzai; the governor's chief of staff, Sam Callejo; and Joe Blanco, the governor's technology adviser.
State officials also say many of the problems arise from the loan program's difficult mission.
Its task is to lend money to companies already considered marginal by the usual bank standards. Loan applicants must have been rejected by at least two financial institutions before they can borrow from the Hawai'i Capital Loan Program.
Loan program administrators must decide which of these high-risk applicants are most likely to boost the state's economy. They must also be flexible with borrowers. Tom Smyth, administrator of the business support division for the Department of Business, Economic Development and Tourism, said the state goes to extreme lengths to help troubled loan recipients make payments.
"The public purpose loses badly when we have to shut someone down because they haven't paid us," Smyth said. "It's far better for everyone if the company stays in business."
State has been 'super good'
When the program works, businesses get low-cost infusions of cash to start or expand operations, add employees and pay more state taxes, a line of reasoning used by administrators at the Department of Business, Economic Development and Tourism to justify the program's performance.
"The state's been good, super good, to us, and has been really good about extending the loan every time we need to," said Mary Ann T. Yokoyama, treasurer of Laser Barcode Solutions Inc., a family business at the Manoa Innovation Center that owes the state $183,000 on a $200,000 loan made in 1994. "Like most small companies, when we go to the bank, it's very difficult to get a loan, and the state has been very good about helping."
But when the system has failed, it has produced embarrassing results. One example is an 11-year-old loan made to Linguatron (USA) Ltd., brainchild of a Japanese entrepreneur who said he had invented a multilingual typing machine.
Nori Sinoto, Linguatron's founder and chairman, persuaded the state to lend him $1 million, which he said would help build a manufacturing plant on O'ahu. He got the money in November 1989 without the state's doing a technical or marketing review of the company's products. The loan represented about 10 percent of the loan program's total available money at the time.
Linguatron's plant was never built, and Sinoto left Hawai'i without repaying a penny.
Smyth called the Linguatron case an anomaly. But at least 36 of 101 Hawai'i Capital Loan Program loans made since 1990 have slipped into delinquency. Among the largest loans, those of more than $500,000, at least seven of 13 have become delinquent, according to several of the loan program's monthly delinquency reports since 1997.
Problem loans include:
$350,000 to Santa Clara, Calif., medical supply company Kinetrix Instruments. The July 1991 loan was made to set up a local marketing and distribution facility for medical equipment. The company is no longer operating and still owes all of its principal.
$600,000 to Keyosk Corp., a family-run business that set up interactive monitors in Waikiki so tourists could make travel reservations online. Financial setbacks sank the company, which never paid any of the principal on its May 1997 loan.
$580,000 to Universal Resource Locator, predecessor to WorldPoint, which now owes the money. No payments have been made on the June 1995 loan since July 1996.
State officials say recent attempts to revamp lending policies should eliminate some of the problems. The program has sought to veer away from direct loans, joining with banks in "participation loans" and seeking to do more "guarantees," in which the state agrees to pay back a bank if a small-business loan fails.
Lending is now targeted toward the technology industry, and the state plans to use its venture-funding arm, the Hawai'i Strategic Development Corp., to supplement the loans with venture capital a more useful financing tool for most startup tech businesses, HSDC director John Chock said.
Financing through venture capital would give the state part-ownership in the business. Even if four out of five companies fail, the one that succeeds could pay a large enough return to cover the others' losses.
"In the past, the state has used the loan program as a venture-funding tool, and that's not the most appropriate way to lend money," Chock said.
The state also plans to lend less money to startups and more to later-stage companies, Chock said.
One result of these efforts has been fewer loans. None have been made in 2001, and only four, for a total of $621,000, were made in 2000.
But none of this has lowered the delinquency rate, which has risen by 7 percentage points from Dec. 31, 1998, when it was 51.3 percent.
Many lenders were surprised about the delinquency rate.
"That's shocking," said the U.S. Small Business Administration's district director in Hawai'i, Andrew Poepoe. But, Poepoe quickly added, "I wouldn't fault the state for having a delinquency rate like that."
"They are taking a higher risk," said Poepoe, whose agency provides loan guarantees for small businesses and has a delinquency rate of about 7 percent. "I absolutely believe there is a need for programs like that."