This article is part of a continuing interview series that spotlights important views from experts in the community and economic development field.
Historically, the success of the small business sector has been a critical component to creating jobs and building a robust and healthy economy. Federal, state, and local governments have recently enacted new or enhanced policies and programs in support of small businesses, one of which is the State Small Business Credit Initiative (SSBCI). The SSBCI program was a component of the Small Business Jobs Act that President Obama signed into law in September 2010. It allows states to build on models for new and existing state small business programs, including but not limited to collateral support programs, capital access programs (CAPs), and loan guarantee programs. Congress funded the initiative with $1.5 billion for new and existing state programs that support lending to and investment in small businesses and small manufacturers. The program is administered by the U.S. Department of the Treasury.
Janet Hamer, senior regional community development manager at the Jacksonville Branch of the Atlanta Fed, spoke with Don Graves, deputy assistant secretary for the Office of Small Business, Community Development, and Housing Policy at the U.S. Treasury Department, about the SSBCI program.
Janet Hamer: I understand the SSBCI program is intended to support state programs that provide financing to small businesses and small manufacturers. That said, what are the desired impacts of the SSBCI program?
Don Graves: The overarching objective is to leverage $10 in private lending and investing in small business to every $1 in public funds, which will, in turn, help create and retain jobs. States use SSBCI funds from the Department of the Treasury to provide credit support to small business loans and investments. Under the program, states can guarantee loans, purchase a participation in a bank loan, contribute to a funded reserve account at a financial institution, or invest directly into small businesses. The program structure varies by state, which gives state officials the ability to tailor their efforts and best address local economic conditions. It is still early in the program implementation phase, but we are already seeing evidence that SSBCI is successfully leveraging small business lending and creating jobs. For example, Louisiana recently used $281,000 of its SSBCI funds to guarantee a working capital loan to a start-up manufacturer, which enabled the company to commence operations and hire 64 new employees.
Hamer: I know that there is a lot of variation and customization in how states are allowed to use their allocations. Can you describe how states in the Sixth District (Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee) are planning to use their SSBCI funds?
Graves: States in the Sixth District operate a range of programs. Approximately two-thirds of total funds allocated among these states support private lending, and one-third of funds support state-run venture capital programs.
|SSBCI program information for Sixth District states|
|Georgia||X||X||X||Georgia Department of Community Affairs|
|Florida||X||X||X||X||Florida Department of Economic Opportunity|
|Louisiana||X||X||Louisiana Economic Development|
|Mississippi||X||Mississippi Development Authority|
|Tennessee||X||Tennessee Department of Economic and Community Development|
Source: U.S. Department of Treasury, complete chart
Here are highlights of some of the regional lending programs:
Alabama operates a CAP, a loan participation program and a loan guarantee program, through the Department of Economic and Community Affairs (ADECA). ADECA reports that its loan guarantee program is popular with a range of financial institutions, including community banks of varying sizes as well as community development financial institutions (CDFIs). In one early success story, ADECA guaranteed a $1 million loan from a CDFI bank to a nursing home facility with 39 employees.
Louisiana Economic Development (LED) used SSBCI funds to reinvigorate an existing loan guarantee program. Lenders in Louisiana are drawn to the program because of the experienced staff and because LED targets a seven- to 10-day turnaround time for approving most loan requests.
Florida operates the full range of programs, including a CAP, a direct loan program, and a loan participation program targeting exporters. All programs, with the exception of the CAP, are managed by Enterprise Florida, a public-private partnership.
Interested financial institutions should contact the state or visit its website for detailed information.
Hamer: Generally speaking, who are the key players in this program, and what can they do to help make program implementation effective?
Graves: The two key players are the state program managers and the financial institution lenders or investors. Program managers are the state agency points of contact who bear responsibility for managing the federal funds, creating the local program guidelines, and approving transactions. In some states, private entities have contracted with the state to administer particular aspects of the program, which is subject to state agency supervision and oversight.
For the program to be effective, banks, credit unions, and CDFIs must be aware of the program and use it. In states that have never operated a credit support program before receiving SSBCI funds, a key challenge is to cultivate a relationship with small business lenders and investors. I encourage lenders and investors to attend the roundtable discussions that are coordinated by the state offices and regulatory agencies because they are an important opportunity to meet state program managers and learn more about the SSBCI-supported state programs.
Hamer: Can you describe how this program might work in conjunction with other existing state and/or local programs?
Graves: The program works well for small businesses that may need an expanded line of credit or a new equipment purchase to grow and create jobs. For example, the value of a business's plant property and equipment may have depreciated significantly during the real estate bust, or historic cash flow from 2009 and 2010 may not sufficiently support the credit request, but current cash flow might. Lenders report that these are the types of businesses that can likely benefit from credit support.
SSBCI-backed programs may use funds to support a transaction where there is additional public money involved. The state must still meet program requirements for generating private financing. Note that public funds do not count toward the state's private leverage requirement. At a minimum, private lenders or investors must have at least 20 percent of the risk in any given transaction, according to the SSBCI Policy Guidelines. It is also worth noting that SSBCI funds may not be used to provide credit enhancement to the unguaranteed portion of loans guaranteed by the federal government such as the Small Business Administration (SBA) or the U.S. Department of Agriculture.
Hamer: Please discuss how this program can provide benefits to underserved communities, women and/or minority entrepreneurs, and perhaps support organizations that seek to provide assistance to these groups. And have you observed any state programs that have been particularly effective in addressing the needs of such businesses?
Graves: As part of its application, each state reported on its plan for expanding access to credit to small businesses in underserved communities. One way for states to target underserved communities is to work with CDFIs that target or are otherwise active in these markets. CDFIs may enroll loans in state guarantee, participation, and collateral programs just as any other bank or credit union might. In other cases, the CDFIs serve the state more directly by acting as a loan packager and servicer or even administering funds on behalf of the state. State program managers perform their own due diligence to determine that each lending partner has sufficient capacity and experience, but in general, CDFIs have been early adopters of SSBCI programs and have made great partners for the states. In Alabama, Mississippi, and Florida, CDFIs enroll loans in state programs, and Georgia has set aside a portion of its allocation specifically to support partner CDFIs.
SSBCI funds may also be used to support lending to nonprofits so long as the financing is for a "business purpose." We anticipate that SSBCI supported financing of nonprofits will be an important part of the program's impact.
Hamer: Are you observing any challenges or barriers associated with the SSBCI program, particularly for the Sixth District?
Graves: The biggest challenge is increasing lender and investor awareness and participation. Many southeastern states have not have operated a credit support program, and it takes some time for a state to develop those working relationships with lenders and investors. For lenders that do not have an SBA platform, SSBCI offers an alternative. But for lenders that do use SBA-guaranteed products, they may ask, "Why would I use SSBCI?" Banks say they use SSBCI to complement SBA-guaranteed products, including loans that need credit enhancement but that may not justify the costs of securing a 75 percent SBA guarantee. The program can also be useful in helping to provide loans to nonprofits, which are not eligible under SBA rules. It can additionally be used to provide bridge loans during the construction phase of a 504 transaction until takeout by the SBA debenture. We also see states focused on short-term working capital financing, in part because of the program's leverage requirements.
Hamer: What do you consider to be the greatest opportunities associated with the implementation of this program?
Graves: SSBCI provides $1.5 billion to support new and existing state programs that provide lending to, and investments in, small businesses and small manufacturers. The program is also expected to spur up to $15 billion in additional private-sector lending and investing. Leveraging this capital is the most immediate opportunity for small businesses across the country. Because every state was entitled to an SSBCI allocation, states collaborated from very early on in the program by sharing program design ideas, template documents, and marketing techniques. The Treasury Department will add to the knowledge-sharing process by disseminating best practices as they emerge. After the five-year SSBCI allocation period ends, the funds will remain within the state budget and can be used to support other small business lending programs. Another important opportunity is to develop the capacity of state-level credit enhancement programs and serve the credit needs of small businesses through innovative, sustainable lending programs and practices. The vision of SSBCI is that states use this opportunity to learn from successful practices and develop long-term capacity to support small business finance in the future.
For more information about the SSBCI program, please visit the Treasury Department's website.