SBA-backed startups failing in Northern San Joaquin Valley

Tutor children. Move furniture. Serve pizza. Sell flowers. Style hair. Repair cars.

That's what some small-business owners dreamed of doing in the Northern San Joaquin Valley. To make their dreams a reality, they and other would-be entrepreneurs turned to the U.S. Small Business Administration for financial backing.

And the SBA came through, guaranteeing their business loans so they could open a company or keep their existing venture going.

Unfortunately, things didn't go well for many of those companies.

At least 95 businesses defaulted on more than $5.2 million in SBA- guaranteed loans in Stanislaus, San Joaquin and Merced counties from January 2007 to May 2009.

Many of those businesses have closed, their phones are disconnected and their employees let go.

That's the case with Huntington Learning Center on Modesto's McHenry Avenue. It defaulted on a $313,267 loan, which the SBA gave up trying to collect in April.

The Huntington loan was one of this region's biggest SBA failures.

"For us, it was a tragedy. We lost one of our top producers," said Russell Miller, Huntington's national vice president of business development. For several years, the Modesto center generated more revenue for the tutoring company than any of its other U.S. franchises.

But in 2006, the Modesto franchise "sold to a gentleman who probably should not have owned a business," Miller said. With the SBA's financial backing, the San Francisco buyer paid top dollar for the fully staffed tutoring service and its clients.

Miller said before long, there were problems and the 16 tutors started leaving. Paying clients soon followed. Then loan payments stopped. The tutoring center closed last year, leaving the SBA liable for the loan.

The government agency also got stuck with a $568,262 debt left by the Southerlands assisted living center in Atwater, $630,913 owed by Linden Associated Growers in Linden, $424,608 owed by Jimboy's Tacos in Manteca, and $167,480 owed by Max Muscle & Tanning in Turlock.

Most of the defaulted SBA loans, however, were for far less. Many were for existing businesses that needed more capital to keep going through tough times.

That was the case with McGrath Moving & Storage, which has been in business in Modesto since 1949.

"We've been struggling to keep our doors open," said owner Terry McGrath, whose company has about 10 employees. "When houses stop selling, people stop moving."

Two years ago, the McGrath company got the SBA to back a $50,000 loan it borrowed from U.S. Bank. But the local economy went from bad to worse, and the moving company fell behind on its payments last year.

"We were still trying to pay back the loan," said Mike McGrath, Terry's son. He said his company sent a loan payment as recently as June, but the bank sent back the money, saying the defaulted loan had been turned over to the SBA for payment.

The SBA had determined in February that the outstanding $45,507 McGrath debt was a "charge-off." Without informing McGrath, it paid U.S. Bank $23,352, the guaranteed portion of the loan, and classified the rest of the debt as something it could not collect.

Such a "charge-off" isn't supposed to take place until the SBA has exhausted all methods to get the borrower to pay what's owed.

"They get tired easy," Terry McGrath said of the SBA's efforts to collect. "They didn't even write us a letter."

SBA spokesman Mike Stamler said that because the McGrath loan was an SBA Express Loan it was made without the moving company putting up any collateral or personal guarantee to repay it.

Stamler said the SBA was satisfied that U.S. Bank did all that was possible to collect the loan from McGrath, so because there was no collateral to confiscate, "it is presumed there is nothing there."

"We haven't heard anything from them yet. We've been waiting," said Mike McGrath, who expected the government agency to put his company on some kind of repayment plan. He said he didn't know the loan was classified as a charge-off until The Bee told him. "I'm not convinced it's all over."

He's right about that.

"McGrath is still obligated for the debt," Stamler said. But it won't be the SBA that asks for the money. "The U.S. Treasury Department does the follow-up with collections."

Bee staff writer J.N. Sbranti can be reached a or 578-2196.