State Small Business Credit Initiative: How It Works & Helps Minority Businesses – Congress loves acronyms – especially those supporting and investing in small businesses. There are MBDA, SBA, PPP, EDIL, SBIC, RRF and so on. But less mentioned is SSBCI, the State Small Business Credit Initiative. This government program was first implemented under the Obama administration as a response to the financial crisis of 2008-2009. Now as we emerge from the COVID-induced recession, this familiar show is back.
In short, the State Small Business Credit Initiative allocates federal funds to states, which in turn provide loans and equity to small businesses and start-ups.
State Small Business Credit Initiative: How It Works & Helps Minority Businesses
States apply for funding and, once approved, are eligible to receive three installments of federal capital. Eighty percent of the funding round must be distributed before states can proceed to subsequent rounds.
Georgia Department Of Community Affairs Georgia State Small Business Credit Initiative April 28, 2016 Southwest Georgia.
The inaugural version brought in approximately $1.5 billion to the state and generated more than $10 billion in investment funding for state programs to support small businesses.
Recently, the US bailout plan provides SSBCI $10 billion. This time, more than a third of these funds are reserved for the socially and economically disadvantaged, tribal governments and technical assistance to micro-enterprises.
As policy makers want 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 note, we will look at how states can use funds from the US bailout plan and draw conclusions on how those dollars can reach minority-owned small businesses.
Sc State Small Business Credit Initiative Ssbci Loan Participation Program
SSBCI provides businesses with the necessary capital or credit 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:
Loan Guarantee Scheme (LGP). With this option, states can provide lenders with partial guarantees for business loans. This is to stimulate private sector lending because if a borrower defaults on a loan, the LGP will guarantee that a certain percentage of that loan will be repaid to the lender. Small businesses typically use these types of programs to secure lines of credit, working capital, and commercial real estate loans. Previous users of this program were usually established companies.
Security Support Program (CSP). Business loans typically require some form of collateral from the borrower to protect the lender in the event of a loan default. But not all small businesses have enough cash to pledge collateral. CSPs have helped small businesses obtain loans by providing cash collateral to lenders to alleviate the “collateral shortage”.
Figure 3: State Small Business Credit Initiative (ssbci) P…
This program often helps entrepreneurs from socially and economically disadvantaged communities who have fewer personal security features, or others whose businesses may be so young that they have not established security within the company.
Capital Access Program (CAP). As an alternative to loan guarantees or collateral support, the CAP offers a reserve fund to protect lenders against partial losses. The lender and borrower contribute 2 to 7% of the loan amount, which is then matched with SSBCI funds from the state. This scheme allows lenders to provide loans and lines of credit to young businesses, while committing to additional loans to increase the CAP reserve pool. Many CAP recipients are micro businesses with fewer than 10 employees or less than $1 million in sales.
Loan Participation Program. LPP does one of two things. First, the state can pose as a lender by buying part of an existing loan. Second, the state may offer a tie-in loan in conjunction with a soft loan from original private sector lenders. Each method helps borrowers get loans on more lenient terms.
The State Small Business Credit Initiative
Companies covered by this program must be established with more than three years of financial statements with proof of deficiencies.
Venture Capital (VC) program. Venture capital is a form of equity investment instead of a loan. Under this program, capital is provided to new companies either from a state-owned venture capital fund or from private VC funds that invest state-owned capital in individual enterprises. The recipients of this type of programs are often companies that may not bring profits immediately, e.g. technological start-ups in research mode or simply introducing new products to the market.
The inaugural version of SSBCI was a success. The program was created to spur up to $15 billion through the use of $1.5 billion in federal funds.
State Strategies For Venture Capital And Rural Development
He held states to account by detailing their program for underserved communities. Community Development Financial Institutions (CDFIs) and community banks played a major role in extending the program’s reach into rural, low- and middle-income areas.
Now, SSBCI 2.0 is six times the size of the original $10 billion federal program. In particular, it distributes billions so that socially and economically disadvantaged people have access to credit and equity investments.
For a business to qualify for set-aside, at least 51% of private or public property is owned by socially and economically disadvantaged people. Like SSBCI 1.0, funds will be sent to states in three tranches.
State Small Business Credit Initiative. Ssbci Overview
These specific cut-outs are critical to the success of SSBCI 2.0, but more will need to be done to provide the support that disadvantaged enterprises need. As policy makers and state leaders work to develop this program, a look at the first iteration of SSBCI provides four lessons on how to ensure that money reaches the people who need it most.
1. States should clearly define low-income areas and minority business owners as targets for SSBCI programs. Using the SSBCI 1.0 program, each state was able to apply its own definition of “underserved”, with different impacts in different areas.
For example, “underserved” New York may be very different from Illinois or Mississippi. Programs such as the NYSBAP, New York State Bond Surety Assistance Program with SSBCI 1.0, have eliminated the barriers faced by underserved companies, especially targeting women and minority owned companies. The program not only supported technical support, but also provided a line of guarantees for minority companies to participate in large state and local projects.
Ssbci And Calcap Webinar W/ Treasurer’s Office
Advantage Illinois, a program developed by the Illinois Department of Commerce and Economic Opportunity to use SSBCI money, defined as underserved as someone who
To better reach these groups, Advantage Illinois partnered with groups such as NICDC, Northern Illinois Community Development Corporation, which provided loans to small businesses.
Southern states such as Mississippi and Alabama allocated half of their SSBCI funding to rural areas. While this met those states’ definitions of “underserved,” not all of these funds went to low-income places. In fact, larger agricultural enterprises, which are not usually short of capital, could benefit from the funds.
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Some states marketed their SSBCI program as a tool that specifically helped small businesses located in low- and middle-income areas, or small minority businesses that were underserved and owned by women and minorities.
However, to do it right, you had to not only know the needs of these groups, but also have the experience of reaching them. As staff recognized the specific needs of these communities, barriers were removed, response times shortened, and funds were distributed more quickly. For example, the state of Utah worked with bank executives and financial networks with established relationships in underserved communities.
These organizations are SBA-certified non-profit organizations that offer flexible and affordable financing to entrepreneurs. Network Kansas, a non-profit and certified development organization, managed the state’s SSBCI program and was committed to nurturing the relationship between entrepreneurship and business development groups. Part of the SSBCI Kansas program mobilized up to 20% of the private capital needed to close the deal.
Localizing The State Small Business Credit Initiative
3. As money moved through community banks and CDFIs, more minority communities were helped. States have included CDFIs in their SSBCI plans because of their commitment to serving underserved communities and helping non-traditional borrowers. When CDFIs were present at the planning table, program coverage became more available in many states. In total, 81% of SSBCI loans were granted by these entities. In California, the California Capital Access Program (CalCAP), the CDFI, pressured “banks and other financial institutions” to provide loans to small businesses that had trouble accessing capital. In 2013, the Opportunity Fund in California made over 2,000 loans. Before SSBCI, this fund could only issue 50 loans. The Opportunity Fund has also served the smallest businesses, offering loans from just a few hundred dollars to over $100,000.
Washington State commissioned CDFI’s non-profit Craft3 to manage some of the SSBCI funds directly to businesses. Craft3 marketed the SSBCI program to various advocacy 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 the collateral deficits faced by minority businesses made the program attractive to lenders and investors looking to reach minority communities.
Minority Business Development Agency
This program delivered 81% of total funding by 2015 compared to the Loan Participation Program at 80%, Access to Capital at 49%, Loan Guarantees at 68%, and Venture Capital at 62%.
The speed of disbursement of funds can be particularly important when developing a state program for two reasons: to promote economic recovery from the COVID-19 pandemic and to better prepare for a $1 billion success bonus in transferring money to socially owned businesses and the economically disadvantaged.
Michigan was able to
Federal Funding For Small Businesses: Understanding The State Small Business Credit Initiative
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