Time is not on the side of small businesses seeking federal assistance to cope with COVID-19 and the economic collapse. This is especially unfortunate since time is essentially what Congress bought with the Paycheck Protection Program (PPP), a short-term mechanism designed to give businesses cash to keep their doors open and employees on the payroll. And while PPP supported at least two-thirds of small business jobs (through early July), Congress has dithered on additional support.
With about one out of four small businesses expecting to need additional government assistance this year, there are steps Congress can take this fall to provide longer-term relief for small businesses. They range from more low-interest loans to money to states to provide grants to smaller Main Street businesses.
Yet while policymakers are rightly focused on preserving businesses, Congress should help entrepreneurs create new ones. New businesses are the source of most net new job creation and economic downturns can present opportunities for new business creation.
With new business applications running unusually high, suggesting perhaps that newly unemployed may be trying to start their own enterprises, Congress can begin to spark an entrepreneurial renaissance with a tool that proved successful a decade ago.
The State Small Business Credit Initiative (SSBCI) was enacted as part of the JOBS Act of 2010, a follow-up to the 2009 stimulus. It is an example of a federal-state partnership that actually boosted job retention, creation, and private capital investment.
Under SSBCI, the Treasury Department allocated $1.5 billion to states allowing them to experiment with ways to support small businesses and help entrepreneurs get capital. Some states used SSBCI to help traditional small businesses with financial support. Many used the program to jumpstart venture capital programs. It worked well.
The federal move grew out of a Michigan proposal during the financial crisis. In 2009 the federal government extended bridge loans to General Motors and Chrysler, and loan guarantees to many “Tier I” auto suppliers, the manufacturers who supply parts and systems directly to the carmakers.
Yet there are thousands of parts in every car and the supplier sector is layered with tiers all the way down to small tool-and-die shops throughout the Midwest. As the auto industry contracted, these smaller suppliers struggled to get credit and stay open.
To help them, the Michigan Economic Development Corporation, a quasi-state agency, piloted a program that assisted credit-worthy Michigan manufacturers and small businesses who were unable to find financing.
The Michigan program became a model for what became the SSBCI. Governors and Members of Congress from the industrial Midwest warned that Congress and the president needed a new law to help downstream suppliers. At the time, Congress and the Obama Administration did not want to limit this new funding mechanism to manufacturers, or even to small businesses and start-ups. So instead of giving it to the Small Business Administration (SBA) or the Commerce Department, the law put it under the aegis of the Treasury Department to allow greater flexibility. Utilizing Treasury’s Capital Access Program, it leveraged private funding and equity markets. States were required to develop programs that would maintain private capital leverage of 1:1 at all times and, with guidance from private sector partners, could reasonably expect to generate $10 of leverage for every $1 in SSBCI funding.
Over the course of three Treasury disbursements, SSBCI moved over $8.4 billion in just under 17,000 new loans and investments that impacted every state and territory, resulting in nearly 200,000 jobs created or retained by 2017, in sectors ranging from sheet metal to farming to health care. More than half of all SSBCI loans or investments went to young businesses less than five years old, and over 40 percent of the loans or investments were in low- or moderate-income communities.
Firms that have the potential to be high growth often require equity financing, But the supply of venture capital is geographically concentrated in just a few places. The National Venture Capital Association reported that in 1995, areas outside the Bay Area, Los Angeles, Boston, and New York accounted for still 48.6 percent of venture capital investment. By 2015, that figure was down to 22 percent. The geographically uneven distribution of venture capital investments not only leaves out most parts of the country, it further excludes more minority and women-owned entrepreneurs.
The federal government is great at spending billions to support early-stage research and development, from Small Business Innovation Research (SBIR) programs across agencies to the National Institutes of Health (NIH) and National Science Foundation (NSF). The feds generally don’t take equity stakes in the companies they help. States, on the other hand, have a range of capital formation initiatives that essentially allow them to bet on companies.
About one-third of total SSBCI funding went to state venture capital programs. The Treasury Department reported in 2016 that $278 million in initial funding of venture capital programs set-up subsequent private financing, ultimately generating about $11 for every $1 in SSBCI funds. Yet beyond the loans processed or jobs created, SSBCI helped states develop or expand their own networks of venture capital investors.
Venture capital is concentrated in a handful of cities, but innovation should be supported in every state. The upper Midwest, for instance, boasts more than 20 percent of all patents, 25 percent of all computer science graduates, and attracts just five percent of venture capital.
In March, Senator Amy Klobuchar introduced the New Business Preservation Act, The Minnesota Democrat’s bill would expand upon the basic structure of the SSBCI, but focus on stimulating private investment in new businesses in locations often ignored by equity investors. If enacted it would allocate $2 billion in federal funds through formulas based on state population. As noted by the Center for American Entrepreneurship, a research and policy group focused on start-ups, more than 80 percent of funding under the Klobuchar bill would go to states in the Midwest, Southeast, and Southwest which currently sees just about 17 percent of the venture capital market.
The Klobuchar bill is consistent with efforts to enable more communities to thrive in the way places like Silicon Valley have, by increasing research and development, boosting skills training, and caulking the drain of talent from heartland communities to the superstar metro areas. Furthermore, Congress should consider a plain vanilla reauthorization of SSBCI by Senator Gary Peters, the Michigan Democrat. Former Vice President Joe Biden has put forward proposals to expand upon the SSBCI and policies to support entrepreneurship have historically attracted bipartisan support. It’s a model that worked during the last recovery. It can’t come soon enough.