The Other Small Business Lending Fund

When President Obama signed the Small Business Jobs Act last week, there was an understandable focus on its eight new tax cuts, the $30 billion Small Business Lending Fund, and its provision to more than double the maximum size of Small Business Administration loans. But one item that seemed to get far less attention may provide some of the biggest benefits: The State Small Business Credit Initiative – a program to support $15 billion in lending through innovative public-private partnerships facilitated by states from coast to coast.

The State Small Business Credit Initiative is not a one-size-fits-all program. Rather, it provides states with the flexibility to strengthen a wide range of initiatives that they have designed to respond to local economic needs – from the manufacturing sector to hard-hit urban areas to rural communities – provided that they lead to $10 of private sector lending for each dollar of public funds invested.

The logic of this initiative is compelling.  Across the nation, there are a host of successful state initiatives run by Democratic and Republican governors that have proven track records of encouraging private sector lending to creditworthy small businesses that would otherwise fall through the cracks. But here’s the rub: These state initiatives are in greater demand by small businesses than ever before, but because of the budget crunches facing nearly every state across the country, they are being cut back just when they are needed most.

Consider two states that were active in calling for this initiative. Maryland has a loan guarantee program that helps cover the risks banks take on when they lend to creditworthy small businesses. Yet, due to budget constraints, the state estimates it has $150 million of loans waiting in its pipeline.  With the announcement yesterday of allocations for the State Small Business Credit Initiative, Maryland will be eligible for funds to support at least an additional $230 million in lending. Michigan found that too many small manufacturers were unable to get the credit they need to diversify their businesses because the value of their real estate collateral had deteriorated. To address this issue, the state created a supplier diversification program that has far more demand than it can meet. Yesterday, Michigan learned it would be eligible for funds to support $792 million in new lending through programs like this. 

Another innovative model that is working in places from Virginia to Colorado to California is the Capital Access Program, or CAP.  This simple model allows lenders to take a chance on sound small businesses by agreeing to set up a loan-loss reserve, where they commit a small amount of funds that the state then matches. In many states, a single dollar of public funds has leveraged anywhere from $10 to $30 of lending to small businesses that could not otherwise get credit.  Yesterday, top officials from the Governor’s office and the Treasurer’s office in California expressed confidence that the increased resources available for their CAP program as well as other state initiatives could spur more than $1.7 billion in new lending to help small businesses and create jobs.

Of course, in an economy that is still coming back from such a deep economic and financial hole, no single policy will be a silver bullet for every small business still struggling to find its footing and expand.  But letting our laboratories of democracy expand and improve on their innovative public-private partnerships to spur lending at a time when many small businesses are still hurting from the financial crisis will be one more step forward.

Gene Sperling is Counselor to the Secretary of the Treasury