Small Business Credit Initiative Florida – Congress loves shortcuts — especially those that support and invest in small businesses. There are MBDA, SBA, PPP, EDIL, SBIC, RRF etc. However, less mentioned is SSBCI, the state’s small business initiative. This government program was first implemented during the Obama administration as a response to the 2008-2009 financial crisis. Now that we’re emerging from the COVID-induced recession, this familiar program is back.
In a nutshell, the State Small Business Initiative allocates federal funds to states, which in turn provide loans and equity capital to small businesses and startups.
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States apply for funding and are eligible to receive three installments of federal capital once approved. 80 percent of the funding round must be disbursed before states can move on to other rounds.
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The first version provided about $1.5 billion to states and generated more than $10 billion in investments in state programs to support small businesses.
The latest US bailout provides $10 billion to SSBCI. This time, more than a third of those funds are reserved for socially and economically disadvantaged individuals, tribal governments and technical assistance for micro-enterprises.
As policymakers seek to support small businesses—especially those owned by people of color, who often struggle to access capital—it’s important to understand how SSBCI works. In this memo, we look at how states can use the funds from the US bailout plan and the lessons learned about how those dollars can reach minority-owned small businesses.
SSBCI provides businesses with the capital or credit they need to obtain loans, especially businesses that would otherwise be overlooked, such as minority-owned businesses. States have five ways to use SSBCI dollars to expand capital, collateral and credit:
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Loan Guarantee Program (LGP). Under this option, states can issue partial guarantees to borrowers for business loans. This is to encourage lending to the private sector because if a borrower defaults on their loan, the LGP guarantees that a certain percentage of that loan will be repaid to the borrower. Small businesses typically use this type of program to secure lines of credit, working capital, and commercial real estate loans. Previous users of this program were more established businesses.
Collateral Support Program (CSP). Business loans usually require some form of collateral from the borrower to protect the borrower in case of loan default. However, not all small businesses have enough cash to post collateral. CSPs helped small businesses obtain loans by providing borrowers with cash collateral to alleviate the “collateral shortfall.”
This program often helps entrepreneurs from socially and economically disadvantaged communities who have less personal collateral, or others whose businesses may be so young that they have not established business collateral.
Capital Access Program (CAP). As an alternative to a loan guarantee or collateral support, the CAP program provides a reserve fund to protect creditors against partial losses. Both the lender and the borrower contribute 2-7% of the loan amount, which is then linked to the SSBCI with funds from the state. This program allows lenders to provide loans and lines of credit to young businesses while committing to additional loans to expand the CAP reserve fund. Many recipients of the CAP program were micro-enterprises with fewer than ten employees or less than $1 million in revenue.
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Loan Participation Program. LPP does one of two things. First, the government can impersonate a creditor by buying part of an existing loan. Or secondly, the government can offer a subordinated loan alongside the original senior loan from private sector lenders. Each of these methods helps borrowers get loans on more lenient terms.
Businesses in this program must be established with more than three years of financial statements with evidence of deficiencies.
Venture capital (VC) program. Venture capital is a form of capital investment instead of a loan. Under this program, capital is provided to new businesses, either from a government-led venture fund or through private venture capital firms that deploy government capital to individual businesses. Beneficiaries of this type of program are often businesses that may not be immediately profitable, such as technology startups in research mode or just bringing new products to market.
The first version of SSBCI was a success. The program was created to stimulate up to $15 billion using $1.5 billion in federal funds.
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She held states accountable by outlining their agenda for underserved communities. And community development financial institutions (CDFIs) and community banks have played a major role, expanding the program’s reach into rural and low- and middle-income areas.
Now, SSBCI 2.0 is six times its original size as a $10 billion federal program. Specifically, it appropriates billions so that socially and economically disadvantaged individuals can access credit and equity investments.
To be eligible for derogation, a business must have at least 51% private or public ownership by socially and economically disadvantaged individuals. Like SSBCI 1.0, funds will be sent to the state in three parts.
These specified limitations are critical to the success of SSBCI 2.0, but more will need to be done to ensure that disadvantaged businesses have the support they need. As policymakers and state leaders work to advance the program, a look at the first iteration of the SSBCI offers four lessons on how to ensure money reaches the people who need it most.
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1. States must explicitly define low-income and minority-owned areas as targets for SSBCI programs. When using SSBCI 1.0, each state could use its own definition of “underserved,” which had different impacts in different areas.
For example, “underserved” in New York can be very different than in Illinois or Mississippi. Programs like NYSBAP, the New York State Bond Surety Assistance Program since SSBCI 1.0, have removed the barriers facing underserved businesses, specifically targeting women- and minority-owned businesses. The program not only helped with technical support, but also provided a guarantee for minority businesses to participate in major state and local projects.
Advantage Illinois, a program designed by the Illinois Department of Commerce and Economic Opportunity to deploy SSBCI money, defined as a person who
And to better reach these groups, Advantage Illinois partnered with groups like NICDC, Northern Illinois Community Development Corporation, which provided loans to small businesses.
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Southern states such as Mississippi and Alabama have dedicated half of their SSBCI funds to rural areas. Although it met those states’ definitions of “underserved,” not all of those funds ended up in low-income places. In fact, larger agribusinesses, which are usually not capital hungry, were able to take advantage of the funds.
Some states marketed their SSBCI program as a tool that specifically helped small businesses in low- and moderate-income areas or for minority, underserved, and women- and minority-owned small businesses.
But to do this well, it was necessary not only to know the needs of these groups, but also to have the expertise to reach them. When staff recognized the specific needs of these communities, barriers were removed, response times were faster and funds were distributed earlier. For example, the state of Utah worked with bank executives and financial networks with established relationships in underserved communities.
These organizations are SBA-certified nonprofits that offer flexible and affordable financing to entrepreneurs. Network Kansas, a nonprofit and certified development organization, administered the state’s SSBCI program and was committed to cultivating relationships between business and business development groups. The Kansas portion of SSBCI’s program kicked in up to 20% of the necessary private capital for the deal.
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3. When money went through community banks and CDFIs, more minority communities were helped. States have included CDFIs in their SSBCI planning because of their commitment to target underserved communities and help non-traditional borrowers. With CDFIs present at the planning table, the reach of programs has become more accessible in many states. A total of 81% of SSBCI’s loans were provided by these entities. In California, the California Capital Access Program (CalCAP), a CDFI, urged “banks and other financial institutions” to make loans to small businesses that had difficulty accessing capital. In 2013, CalCAP’s Opportunity Fund made more than 2,000 loans in California. Before SSBCI, this fund could provide only 50 loans. Opportunity Fund has served even the smallest businesses with loans ranging from a few hundred dollars to more than $100,000.
Washington State has contracted with a non-profit CDFI, Craft3, to administer a portion of the SSBCI funds directly to the business. Craft3 offered the SSBCI program to various groups in underserved communities and provided loans in high poverty and rural areas.
4. Security programs spend their money the fastest. During SSBCI 1.0, the Collateral Support Program’s ability to address collateral shortfalls faced by minority businesses made the program attractive to lenders and investors seeking to reach minority communities.
This program accounted for 81% of total funding by 2015, compared to the Loan Participation Program at 80%, Access to Capital at 49%, Loan Guarantee at 68% and Venture Capital at 62%.
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The speed of disbursement of funds may be particularly important in the design of the state program for two reasons: to support the economic recovery after the COVID-19 pandemic and to be better positioned to award $1 billion in bonuses for the successful raising money to owned businesses. by social partners. and economically disadvantaged individuals.
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