The biggest small business loan program you've never heard of is back and bigger than ever
The biggest small business loan program you’ve never heard of is back and bigger than ever

After the Great Recession, this program turned $1.4 billion in federal dollars into $10.7 billion in small business loans. Now he receives 7 times more funding.

Thelma Johnson is preparing to kick-start economic recovery after the COVID-19 pandemic in Albany, Georgia, a city of 75,000 in the southwestern part of the state. She is the CEO of Albany Community Together, a community development financial institution or CDFI specializing in lending to small businesses in the Albany area.

The pandemic hit Albany “like a bomb”, wrote the New York Times last year. About 90,000 people live in and around Albany, and 70% of them are black, including Johnson and almost all of his clients.

“You can imagine that every black family knows someone or is someone affected by COVID-19,” Johnson told me in a May 2020 interview. “Three or four generations of a family can live in one house, so you see families with multiple cases across multiple generations at once. It’s been the craziest thing, so much grief, so much pain, but people persevere in their endeavors because they want to provide a life for their families.

Johnson disagreed when Georgia began issuing orders to reopen businesses from April 2020. At the time, Albany Community Together had about 34 borrowers in its portfolio, including hair salons and barbershops, food companies and manufacturers. Johnson says most of his customers have remained closed because his organization has found ways to support them in other ways — restaurants could switch to curbside pickup. Nearly half of its borrowers have deferred payments for at least three months.

“Some are going to need funding to revive themselves,” Johnson said last May. “Restaurants will need funding to redo floor plans. If they don’t get that funding, we will lose our black businesses. It is difficult to create an inherited black business that can be maintained and passed on to the family. »

If the economic stimulus plan builds on last time, it could be a boon for Albany.

During the Great Recession, a federal pilot program called the State Small Business Credit Initiative provided $1.4 billion in flexible funding to states to support small business lending. Georgia received approximately $47 million. States that received the funding partnered with local lenders like Albany Community Together to roll out the funds. Johnson’s group received $3 million in funding from the initiative, which it used to provide $21 million in loans to 20 small businesses in the Albany area employing about 140 people. Some of those businesses, Johnson says, planned to move if they couldn’t get the capital they needed.

As part of the US rescue plan adopted in March, Congress is organizing a second round of the State Small Business Credit Initiative. This time it provides $10 billion. States have until Friday to notify the US Treasury that they plan to seek funding under the initiative, then they will have until December 11 to submit a full application with a plan for using those funds. over the next ten years. . Georgia expects to receive an initial $117 million this time around — and also, states that successfully reach historically marginalized communities are eligible for additional funding.

“We’re locked and loaded and ready to go,” Johnson says.

States were once much more active in supporting small business lending than they were when the Great Recession hit. According to Toby Rittner, president and CEO of the Council of Development Finance Agencies, years of austerity budgets have slowly but steadily cut state program after state program for small business loans.

“In the 1990s, there were still all kinds of state programs for small business loans,” says Rittner.

State small business loan programs have taken various forms. Some have provided loan loss reserves, which serve as collateral to encourage private lenders to provide small business loans to borrowers who themselves lacked access to the necessary collateral. Sometimes government support for the loan loss reserve would allow the lender to charge borrowers a lower interest rate than they would otherwise have, which can be very helpful in terms of cash flow for the lender. ‘business.

Some states had loan participation programs, in which the state purchased a portion of a small business loan issued by a private lender, removing some of the risk from the private sector as an incentive to make more small business loans.

According to Rittner, the rise of CDFIs and other small business lending groups made many states feel like these new institutions had everything covered, so they began cutting funding for these programs. In some states, programs were still running, but no funding was allocated to them.

“The idea with the state’s first small business credit initiative was that we needed to be able to recapitalize all of these state lending devices and figure out how to unlock capital at rates small businesses can afford. “, says Rittner. “For me, it cannot be underlined enough, [the State Small Business Credit Initiative] re-established the infrastructure for states to implement these programs.

The first initiative, billed as a pilot project, ran from 2011 to 2017. It provided $1.4 billion in funding for states to use in a variety of ways, but gave states a goal that every dollar of initiative leveraged $10 from other sources. For example, $1,000 of loan loss reserves could allow for a business loan of $10,000.

With this target ratio, from 2011-2016 the $1.4 billion from the State Small Business Credit Initiative supported 21,000 loans and investments totaling $10.7 billion. The median size of businesses that accessed credit under the initiative was just three employees. The median loan amount was $33,000. Forty-one percent of these businesses were owned by women or people of color, and 42.9 percent were located in low-to-moderate income areas.

The second round is much larger — $10 billion in new funds appropriated by Congress — with the same ten-to-one leverage target.

Of this total, half will be initially distributed to each state using “a needs-based formula based on economic factors such as job losses and the pace of economic recovery”. An additional $500 million specifically for companies with fewer than ten employees will also be distributed to states according to a formula. Another $1.5 billion in funding was earmarked for “business enterprises owned and controlled by socially and economically disadvantaged people,” to be split equally state by state according to a formula. There is also $500 million originally set aside for distribution to tribal governments.

And there’s also $1 billion set aside for the Treasury to award to states later, based on their performance in reaching socially and economically disadvantaged business owners.

“We have yet to speak to a single state that has not been fully aware of the racial disparities resulting from this pandemic,” Rittner says. “We didn’t have that conversation in SSBCI 1.0. Even in states where you wouldn’t expect it, we hear about the focus on underserved markets and racial disparities.

States have until December 11 of this year to submit their complete applications. Only three states did not apply the first time around – Alaska, North Dakota and Wyoming. In these cases, a state declines to apply, cities or groups of cities in that state may submit an application instead. Anchorage, Alaska and consortia of cities in North Dakota and Wyoming ended up submitting their own applications last time out. This time around, Rittner says he’s heard from fifty states that they’re going to apply.

By December, it’s time for states to reach out to local lenders and other voices to figure out how to use the new funds, whether that means simply deploying them through existing programs or grabbing the opportunity to create new programs.

“States need to really come out and listen and really find out where the real needs are. It’s been proven time and time again that if you just put up a sign that says ‘we lend’ people don’t start showing up,” says Rittner. “States are going to have to come out and listen, they’re really going to have to encourage these community groups to come to them. If no one comes to tell a state that, they won’t know how to get there.

Rittner says most states have designated their national economic development agency or similar quasi-governmental entity as responsible for their requests.

In Albany, Johnson says she expects CDFIs and other lenders across the state to soon begin meeting with state officials to begin determining how to implement the initial $117 million allocated to Georgia.

Rittner also says states could consider using funding from the state’s Small Business Credit Initiative to create state-owned banks. Only North Dakota currently has a public bank, established in 1919, and it has helped that state weather numerous economic downturns and natural disasters over the decades. Over the past year, state lawmakers have considered public banks in California, New Jersey, New Mexico, Massachusetts, Hawaii, New York and Oregon – but initial funding and capitalization of public banks have been an obstacle.

“I don’t see why it wouldn’t be legal, as long as they could directly identify the leverage ratio on the back-end,” Rittner says. “I think it’s totally doable for them to start something like this using those funds.”

Oscar is Next City’s senior economics correspondent. He previously served as Next City Editor-in-Chief from 2018-2019 and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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