By refusing to honor billions in state-issued IOUs beyond Friday, California's largest banks intensified the state budget crisis and created potential cash-flow problems for vendors and local governments.

The big banks, led by Bank of America, Wells Fargo and Chase, held firm in their promise not to accept the state's registered warrants after the close of business Friday. Business owners and other IOU holders scrambled to find alternative methods of cashing in the notes, such as taking out short-term loans or applying for membership in credit unions still willing to accept the IOUs.

The only major banks to relent were Citi and Bank of the West. Citi said it would honor the IOUs until next Friday, and Bank of the West said it would accept them from current customers "until further notice."

"We wanted to help our existing customers," said Bank of the West spokesman Jim Cole.

The other big banks said they would offer lines of credit or other forms of assistance to cash-strapped customers, but only on a case-by-case basis.

"We'll work with them, just like we always do," said Bank of America spokeswoman Julie Westermann. But "we will only make loans to people who are creditworthy," she said.

More than $390 million in IOUs have been issued by the state controller's office since a week ago Thursday, with another $2.5 billion set to go through the end of the month. As long as most big banks were willing to honor the notes, recipients could treat them like regular checks. When that ended Friday, they started looking for answers.

Capital Datacorp, a hardware-software vendor in North Highlands, was able to cash $3,000 in IOUs earlier this week at Wells Fargo – but is still due to be paid $750,000 by the state this month. That represents 75 percent of its business.

"If I get hit with IOUs on that, that's a game-changer," said company President Al McGorry.

McGorry and suppliers are used to cash-flow issues caused by state budget problems. But the enormity of the problem this time is making things scarier.

"This year happens to be worse," said Steve Hanson, owner of Squaw Valley Office Supply in Rancho Cordova. His firm is owed about $70,000, and cash-flow problems could force him to slow down paying his own bills.

"We'll pay who we can pay," he said.

Adding to contractors' worries, the volume of state orders for new business has dropped off considerably, McGorry said. And state agencies have asked Capital Datacorp and many other vendors to cut their prices 15 percent, in line with Gov. Arnold Schwarzenegger's June 8 executive order that contracting expenses be trimmed.

"There isn't 15 percent to reduce," McGorry said. "Our profit margins are in the single-digit range."

As for the IOUs, anxiety was starting to build among counties and other local governments, which use state money to deliver social services. So far they've received just a handful of IOUs, but by the middle of next week they'll be deluged. Most appear to have enough internal cash for the time being, but they'll be in deep trouble if the crisis drags on for weeks and weeks.

"We're in a pickle," said Jean Hurst, legislative representative at the California State Association of Counties.

State Treasurer Bill Lockyer tried to persuade the big banks to change their minds about the IOUs. "We're just trying to convince them that it would be in the best interest of their customers and the best interest of taxpayers to give it more time," said his spokesman Tom Dresslar.

Gov. Arnold Schwarzenegger made no such attempt at persuasion. "His focus is to get a solution to our budget so we don't have to deal with IOUs," said his spokesman Aaron McLear. "I don't think it was anyone's expectation that they would honor them forever."

Emerging from a meeting with legislative leaders Friday, the governor would say only that "IOUs are one more reason to get the budget done as quickly as possible."

In 1992, the last time the state issued IOUs, the major banks accepted them for about a month. Their refusal to go any further was widely seen as a move to pressure officials to pass a budget.

Call The Bee's Dale Kasler, (916) 321-1066. Read his blog on the economy, Home Front, at www.sacbee.com/blogs.