Final Report. January The Urban Institute. Prepared for: U.S. Small Business Administration. Prepared by: Rachel Brash

Transcription

1 PUBLIC SECTOR DUPLICATION OF SMALL BUSINESS ADMINISTRATION LOAN AND INVESTMENT PROGRAMS: AN ANALYSIS OF OVERLAP BETWEEN FEDERAL, STATE, AND LOCAL PROGRAMS PROVIDING FINANCIAL ASSISTANCE TO SMALL BUSINESSES Final Report January 2008 Prepared for: U.S. Small Business Administration Prepared by: Rachel Brash The Urban Institute 2100 M Street, NW Washington, DC 20037

2 Public Sector Duplication of Small Business Administration Loan and Investment Programs: An Analysis of Overlap between Federal, State, and Local Programs Providing Financial Assistance to Small Businesses Final Report January 2008 Prepared By: Rachel Brash The Urban Institute Metropolitan Housing and Communities Policy Center 2100 M Street, NW Washington, DC Submitted To: U.S. Small Business Administration 409 Third Street, SW Washington, DC Contract No. GS23F8198H UI No The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

3 Public Sector Duplication of SBA Loan and Investment Programs i CONTENTS INTRODUCTION...1 BACKGROUND...2 Definition of Duplication...2 Program Overviews Section 7(a) Loan Guarantee Program...4 Certified Development Company (504) Loan Program...5 MicroLoan Program...5 Debenture Small Business Investment Company (SBIC) Program...6 METHODOLOGY...7 FINDINGS...11 Duplication Overview...11 State and Local Programs Benefiting Businesses of All Sizes...17 Duplication Analysis by Program and Sector...18 Section 7(a) Loan Guarantee Program /CDC Loan Program...39 MicroLoan Program...43 SBIC Program...45 CONCLUSION...47 REFERENCES...49

4 Public Sector Duplication of SBA Loan and Investment Programs ii INDEX OF TABLES Table 1: SBA Program Overview...4 Table 2: Study States...8 Table 3: Study Cities...9 Table 4: Public Sector Financial Assistance Programs for Small Businesses...11 Table 5: Federal Financial Assistance Available to Small Businesses...13 Table 6: State and Local Financial Assistance Programs for Small Businesses...16 Table 7: Size Standards for 504 and 7(a) Loans...20 Table 8: Comparison of 7(a) and 504 Loan Program Attributes...21 Table 9: Use of Proceeds by Firms Receiving 7(a) Loans Only, Table 10: Average Loan Amount for Firms Receiving 504 and/or 7(a) Loans, Table 11: Average Maturity Term (in months) and Interest Rate, Table 12: Comparison of Ownership and Firm Characteristics for Recipients of 7(a) and/or 504 Loans, Table 13: Comparison of Industry for Recipients of 7(a) and/or 504 Loans, Table 14: Comparison of Business Location for Recipients of 7(a) and/or 504 Loans, FY Table 15: Nonprofit Microenterprise Programs...45

5 Public Sector Duplication of SBA Loan and Investment Programs 1 INTRODUCTION This study investigates government programs that provide assistance similar to the assistance provided through SBA s 7(a) Loan Guarantee, 504 Loan, MicroLoan, and Debenture Small Business Investment Company Programs: that is, programs that potentially duplicate or overlap with SBA s programs. The study was conducted using SBA administrative data, online research, and conversations with SBA district staff and Small Business Development Center officials. The research found that at the federal level some potential duplication exists between SBA s 504 and 7(a) programs: between 1997 and 2005, almost half of the loan volume to firms receiving only 7(a) loans which can be used for working capital, equipment, and real estate went toward real estate, despite the fact that the 504 program provides loans exclusively for fixed assets, typically to finance real estate purchases. The research also found that although several federal agencies have financial assistance programs for small business, the SBA is the most significant federal source of financing for small businesses not in rural areas. The U.S. Department of Agriculture (USDA) appears to be the primary provider of loans and loan guarantees for small businesses in rural areas. A greater amount of potential duplication exists at the state and, to a lesser extent, local level. This duplication exists for the most part among federal, state, and local general-purpose loan and loan guarantee programs that resemble the SBA s 7(a) program. There are fewer state and local loan and loan guarantee programs that resemble the 504 program, which provides loans exclusively for fixed assets, typically to finance real estate purchases. Few states or localities run microloan programs, though a handful of nonprofit microenterprise organizations receiving a majority of their funding from government sources (i.e., public nonprofits) have loan programs. It appears that many states rely on local and national public and private nonprofit organizations in addition to the SBA to provide businesses with small loans. All of the study states have state-run or state-funded venture capital programs, but these state programs focus much more heavily on technology, science, and healthcare than the debenture SBIC program does. The extent of similarities among federal, state, and local loan and loan guarantee programs varies by state and program. In general, SBA programs have higher maximum loan and loan guarantee amounts and longer terms than state and local programs. Size standards are similar for SBA, state, and local programs, although a few study states and localities have size standards considerably smaller than SBA standards. Standards for industry sector, geographic market, and growth stage are similar for SBA programs and state and local programs. Whether a business chooses a state or local program instead of an SBA program or whether a bank decides an applicant should apply for a particular program may be

6 Public Sector Duplication of SBA Loan and Investment Programs 2 influenced by factors such as credit history, differences in fees, interest rates, amount of paperwork required, job creation requirements, or prevailing wage standards. The next section discusses the issue of duplication and provides a description of the four SBA programs of interest. Section III presents the study methodology, which explains how chose the state and city samples were selected, and what program characteristics were used to assess whether overlap exists. The findings section is divided into two subsections: one that provides an overview of the array of loan and loan guarantee programs within states and localities, and one that provides an analysis of the duplication between the SBA s 504 and 7(a) programs and of each of the four programs at the federal, state, and local levels. Because the greatest amount of duplication exists among state and local general-purpose loan and loan guarantee programs, the sections on state and local duplication of the 7(a) program are further divided into subsections addressing program characteristics, including eligible businesses, eligible uses, industry sector, geographic market, growth stage, loan or investment amount, and loan term. Appendix A presents the number of federal, state, and local programs potentially duplicating SBA s programs. Appendix B presents the program characteristics for each of the four SBA programs of interest. The complete inventory of federal, state, and local programs identified in this study can be found in Appendices C-F. Appendix G presents average interest rates and maturity terms from 1997 to 2005 for firms receiving 504, 7(a), and both types of loans as part of the comparison of those two SBA programs. BACKGROUND This study investigates government programs that provide assistance similar to the assistance provided through SBA s 7(a), 504, MicroLoan, and debenture SBIC programs: that is, programs that potentially duplicate or overlap with SBA s programs. Definition of Duplication For the purposes of this paper, programs are considered as duplicative if there is overlap in type of aid, eligible businesses, eligible uses, industry, geographic market, growth stage, loan or loan guarantee amount, and maturity term. The analysis of duplication between the SBA s 7(a) and 504 program examines whether funds from the 7(a) program, the general-purpose loan program, were being used for real estate purposes. The comparison of the 7(a) and 504 programs also includes an analysis of the business characteristics of firms receiving only 7(a) loans, those receiving only 504 loans, and those receiving both loan types. Even if the program proceeds were being used for the same purpose the programs might not be duplicative if they

7 Public Sector Duplication of SBA Loan and Investment Programs 3 were serving different types of businesses. However, duplication might exist if the programs were serving similar populations and being used for the same purpose (i.e., fixed assets). A more general definition might define duplication as programs that overlap in stage of financing, industry and region served and where there is not enough demand for the supply of assistance offered by the coinciding programs. For the purpose of this study, such a definition is inappropriate because of the difficulty of establishing market demand for small business financing. That multiple programs provide similar services does not necessarily mean that resources are being wasted. If duplication does exist among loan and loan guarantee programs, it may result in higher overall administrative costs or a more complex application process than would exist with fewer programs. Fewer programs might simplify the process for applicant businesses and for lenders helping businesses determine which programs they are eligible for. However, some duplication is inevitable, and having multiple access points might mean that a broader range of small businesses is able to access capital. Additionally, the existence of parallel programs may mean that the demand for such assistance exceeds the supply. Program Overviews All four SBA programs studied here have the effect of making capital available to small businesses that might otherwise have difficulty accessing funds. The programs differ in their scope, vehicle, and purpose. The SBA s largest programs, the 7(a) and 504 programs, are similar because they provide large amounts of money to businesses that have been denied credit by private funding sources. As is discussed in more detail below, the financing mechanisms for the programs differ: Under the 7(a) program, SBA guarantees a loan issued by a bank or other private lender, whereas under the 504 program, the SBA guarantees a debenture issued by a nonprofit certified development company. As shown in Table 1, the two programs also differ in that 7(a) loans can be used to finance most business purposes, including both working capital and fixed assets, while 504 loans can only be used to finance fixed assets. The MicroLoan program differs from the 7(a) and 504 programs in that it provides much smaller loan amounts and the SBA originates the loans. Rather than providing or guaranteeing loans for small businesses, the debenture SBIC program guarantees debentures issued by venture capital firms that invest in small businesses.

8 Public Sector Duplication of SBA Loan and Investment Programs 4 Table 1: SBA Program Overview Program Program Type Use of Proceeds Maximum SBA Exposure Does program have a credit elsewhere requirement? Loan Volume, Section 7(a) Loan Guarantee Loan guarantee Working capital, fixed assets, and other general business purposes $1.5 million Yes $86.8 billion CDC/504 Debenture guarantee Fixed assets only $4 million Yes $18.0 billion MicroLoan Loan General business purposes Small Business Investment Company (SBIC) Debenture guarantee Investment in small businesses $35,000 Yes $235 million 300 percent of equity raised by small business investment company No $6.6 billion Section 7(a) Loan Guarantee Program The Section 7(a) Loan Guarantee Program provides loan financing to small businesses deemed unable to obtain financial assistance on reasonable terms in the private credit markets. The Office of Management and Budget (OMB) PART Assessment for the 7(a) program states: the loans guaranteed by SBA are of a lower quality from what the private sector is willing to make (Office of Management and Budget, 2005). Most of the small businesses aided in the 7(a) program are minority-, women-, or veteranowned, or located either in rural areas or in special zones determined by federal legislation to be in special need of economic development aid. About one-third of businesses are start-ups. The Section 7(a) program is delivered by private lenders that make, service, and liquidate loans. Under the program, the SBA guarantees up to 85 percent of principal and interest of any loan. Lenders set loan terms and conditions according to the purpose of the loan and form of collateral (e.g., real estate or equipment), loan size, and perceived risk, consistent with maximum rates and terms set by SBA. SBA charges a loan guarantee fee, which is usually paid by the borrower. These loans are intended to supply the kinds of credit that may not be easily available to the class of borrowers the program targets. This credit includes loans of longer maturity to borrowers of higher credit risk, who can offer only single-purpose collateral and have limited equity (Office of Management and Budget, 2005).

9 Public Sector Duplication of SBA Loan and Investment Programs 5 As detailed in Appendix B, the maximum amount that the SBA guarantees under the program is $1.5 million. Interest rates are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate. Businesses can use 7(a) loans to finance working capital and fixed assets, and for limited refinancing of existing debt. Refinancing is permitted in limited cases; a borrower cannot use 7(a) loan proceeds to pay a creditor in a position to sustain a certain loss that would be shifted to the SBA. Between 1997 and 2005, the SBA guaranteed $86.8 billion in loans under the 7(a) program. Certified Development Company (504) Loan Program Like the 7(a) program, the 504 program provides loan financing to small businesses deemed unable to obtain financial assistance on reasonable terms in the private credit market. It differs from the 7(a) program in two significant ways: (1) loans obtained through the program can only be used for fixed assets (i.e., land and buildings) and (2) the 504 loans have fixed interest rates (under the 7(a) program, rates are fixed or variable). Under the 504 program, businesses obtain loans through a certified development company (CDC), local nonprofit organizations that work with the SBA, and a private-sector lender. There are about 270 CDC s nationwide. The typical 504 project includes a loan secured with a senior lien from a private-sector lender, covering up to 50 percent of the project cost; a loan secured with a junior lien from a CDC, covering 40 percent of the project cost (backed by a 100 percent SBA-guaranteed debenture); and a contribution of at least 10 percent equity from the small business. Maximum amounts allowed under the program vary based on the goal of the loan. Under the 504 program, the maximum debenture for businesses other than small manufacturers is $1.5 million. For small manufacturers, the maximum debenture is set considerably higher, at $4 million. Refinancing is permitted under the 504 program in very limited circumstances. Interest rates are pegged to an increment above the current market rate for five- and ten-year U.S. Treasury issues. Program fees are approximately three percent and can be financed with the loan (U.S. Small Business Administration, 2006a). From 1997 to 2005, the SBA guaranteed $18.0 billion in loans under the program (SBA administrative data). MicroLoan Program The MicroLoan program provides very small loans to start-up and early-stage businesses. The SBA provides funds to community-based intermediaries that accept applications from potential borrowers, evaluate ability to repay, provide technical assistance to prospective and current

10 Public Sector Duplication of SBA Loan and Investment Programs 6 borrowers, and originate and service loans. 1 The maximum loan amount is $35,000, although the average loan size is about $10,500. Loan terms are for a maximum of six years, although actual terms vary, and interest rates are set by the intermediaries, in part based on their own cost of funds. All intermediaries are required to supply technical assistance to firms seeking loans, supported by SBA grant funds of up to 25 percent of the total balance owed to SBA on loans the intermediaries originate. For any loan exceeding $20,000, intermediaries are obliged to certify that the borrowers are not otherwise able to obtain credit. Industry sources claim that the overwhelming majority of microloan borrowers have no established credit record. Between 1997 and 2005, the SBA provided $235 million in microloans. Debenture Small Business Investment Company (SBIC) Program The debenture SBIC program makes capital available to small business investment companies that are privately owned, for-profit companies licensed by the SBA to provide venture capital to start-up and expanding small businesses. Rather than provide assistance directly to small businesses, under the debenture SBIC program, the SBA allows privately operated venture capital funds to leverage their capital through SBA-guaranteed. Debenture SBICs may issue securities that provide for a maximum of 300 percent leverage of equity raised by the SBIC (U.S. Small Business Administration, 2004). Debentures issued by SBICs pay market interest rates to investors through semi-annual interest payments for ten-year terms. Debenture SBICs may prepay their securities at any time; prepayments after five years carry no penalty (U.S. Small Business Administration, 2004). Debenture SBICs are obligated to make all payments to investors, and so companies in which debenture SBICs invest must have sufficient cash flow to allow the SBIC to service its debt by the time the first semi-annual interest payment is due. Debenture SBICs provide equity capital, long-term loans, near-equity investments, and management assistance to qualifying small businesses, using their own funds and funds borrowed or otherwise obtained at favorable rates with SBA guarantees. In general, assistance provided by debenture SBICs is some form of mezzanine financing: subordinate debt 2 that also includes warrants or options that can be exercised by the SBIC to take an equity position in the company. From 1997 to 2005, the SBA provided $6.6 billion in guarantees to debenture SBICs. 1 As of spring, 2005, there were 170 active intermediaries. 2 The debt instrument originated by the debenture SBIC is often subordinate to other debt which could be conventional or with an SBA guarantee that the firm already has on its balance sheet.

11 Public Sector Duplication of SBA Loan and Investment Programs 7 METHODOLOGY The research question answered by this report is, Do SBA programs duplicate or overlap with other public programs? Of interest are federal, state, and local programs providing services similar to those offered through four of SBA s major financial assistance programs the Section 7(a) Loan Guarantee Program, 504 Loan Program, MicroLoan Program, and SBIC Debenture Program. Also of interest is overlap between SBA s two largest programs, the 7(a) and 504 programs. Time and resources permitted a comprehensive review of most federal programs, but not most state or local programs. The examination of state and local programs uses a sample of 12 states and 12 cities. To create an inventory of public programs, a search of on-line information was conducted; this included reviewing Web sites run by federal, state, and local government agencies, as well as on-line reports, directories, and journal articles. To confirm and augment the information found on-line, discussions were conducted with ten SBA district officials and with ten state directors of Small Business Development Centers, one-stop shops for small business assistance that are partially funded by the SBA. The review of federal programs examines programs that target small businesses in addition to ones that provide financial aid to both small businesses and a wider range of businesses. 3 A significant amount of assistance may go to small businesses by way of these broader programs. The inventory of federal programs appears in Appendix C. The standards for inclusion for the state and local programs were more restrictive; only those programs specifically targeted at small businesses are included in the list of state and local programs (Appendix D). Including finance programs for businesses of all sizes would have increased the number of programs to a degree not within the scope of this study. Major state and local programs providing financial aid to all businesses are not included in the inventory, but are discussed in the text of this section. Also discussed in the text, but not included in the inventory, are 3 To develop the inventory of federal financial assistance programs, the authors consulted a GAO study, Multiple Federal Programs Fund Similar Economic Development Activities (September 2000). All the programs mentioned in the GAO study were reviewed. Many of the programs provided technical assistance or funds for planning, strategic development, or research (but not loans, loan guarantees, or other investment) to businesses or financial assistance to nonprofit or public bodies for the purpose of economic development not specifically related to small business development. Programs that provide loans, loan guarantees, and grants to small businesses (i.e., programs providing assistance similar to the four SBA programs of interest) were included in this duplication study. Programs that provide grants to entities that may re-lend to small businesses were not included in the inventory because they are not explicitly designed to provide assistance similar to SBA assistance. However, these programs are discussed in the text and detailed in Appendix C.

12 Public Sector Duplication of SBA Loan and Investment Programs 8 programs targeted at businesses run by certain groups, such as women or minorities. These programs are of interest because many of their recipients are likely to be small businesses. To determine the sample sizes for the state and local program inventory, data on lending frequency and volume for the 7(a) and 504 programs from fiscal years 2003 to 2005 were examined. Recent data were used to determine the current state of potential duplication; this research analyzed data for only these two programs because it seemed likely that high lending activity for these programs would correspond with high volume and frequency for the MicroLoan and SBIC programs. 4 The sample size was initially set at ten states because a natural break in the lending frequency occurred after the tenth state. Because the ten high-activity states did not include states that are mostly rural, the SBA requested that two such states, Maine and North Dakota, be added to the sample. These ten high-activity and two rural states are listed in Table 2 with their 7(a) and 504 loan activity. Table 2: Study States State Loan Activity 1 California 33,297 2 Texas 16,357 3 New York 12,825 4 Florida 12,671 5 Pennsylvania 12,530 6 Massachusetts 7,822 7 Ohio 7,310 8 New Jersey 6,544 9 Illinois 6, Michigan 5, Maine 1, North Dakota 870 Note: Loan activity equals the number of firms receiving 7(a) and 504 loans in fiscal years 2003 to Analysis of SBA administrative data indicates that the study states are among the states with the highest levels of SBIC and MicroLoan activity, as measured by lending volume and frequency, for fiscal years 2003 to 2005.

13 Public Sector Duplication of SBA Loan and Investment Programs 9 To create a local sample, ten cities with the highest frequency of 7(a) and 504 loans from fiscal years 2003 to 2005 in each of the ten high-activity study states were selected. Two study states, California and Texas, each had two cities with high frequency of loans relative to other cities nationally. Both cities in those states were included in order to highlight variation in borrowing opportunities across a state. The ten cities of interest are listed in Table 3 with their 7(a) and 504 loan activity. Had the city sample been drawn to include the 10 cities with the highest frequency nationally, regardless of whether they fell within the ten study states, the list would have included Phoenix and Las Vegas, and not Cleveland, Boston, Jersey City, or Detroit. However, this study examines only cities that fall within study states because the research suggests that the greatest amount of overlap exists between federal and state programs and not at the local level. Therefore, looking at a city without examining the state programs did not seem to add value to the research. UI s approach examines the range of programs available, from federal to local, in each of the study states. Table 3: Study Cities City Loan Activity 1 Los Angeles 3,821 2 Houston 2,489 3 New York City 2,363 4 Miami 1,976 5 Dallas 1,213 6 Chicago 1,183 7 Philadelphia 1,129 8 San Diego 1,116 9 Boston Cleveland Detroit Jersey City 117 Note: Loan activity equals the number of 7(a) and 504 loans in fiscal years 2003 to The analysis of duplication between the SBA s 504 and 7(a) programs used administrative data collected by the SBA. Two types of analysis to measure possible duplication were conducted. The first analysis looked at whether 7(a) funds were used for real estate

14 Public Sector Duplication of SBA Loan and Investment Programs 10 purposes. The SBA does not systematically collect information on use of proceeds, but the agency treats maturity term length as a substitute measure for use. Loans with terms of less than 7 years are considered working capital loans, those with terms of 7 to 15 years are considered heavy equipment loans, and those with terms of greater than 15 years are considered real estate loans. Because 7(a) loans with a term of more than 15 years are considered to be for real estate purposes, they are potentially duplicative of the 504 program. The 504-7(a) comparison also includes an analysis of the business characteristics of firms receiving only 7(a) loans, those receiving only 504 loans, and those receiving both loan types. Even if the program proceeds were being used for the same purpose, the programs might not be duplicative if they were serving different types of businesses. However, duplication might exist if the programs serve similar populations and are used for the same purpose (i.e., fixed assets). The analysis proceeded in the following sequence: Assembled an inventory of all federal, state, and local programs available to small businesses through internet searches and conversations with program officials in selected federal agencies, states, and localities, including regional and district SBA officials. Constructed a matrix of program policies and activities, to be filled in with information on target businesses, terms and conditions of assistance, types of assistance available, program resources, and other aspects of programs. Conducted data analysis for comparison of SBA s 504 and 7(a) programs using SBA administrative data. Obtained descriptive information on SBA programs, other federal programs, and state and local programs from government agency and nonprofit lender websites and from discussions with SBA district staff and Small Business Development Center state directors. The program comparisons consider eight program characteristics. They examine type of aid (e.g., does the program take the form of a loan, loan guarantee, microloan, grant, or other form of assistance), eligible businesses, eligible uses, industry sector, geographic market, growth state, amount, and term. The comparisons do not systematically address interest rates because they vary considerably within programs, and making generalizations about them proved difficult. Programs were considered as duplicative if there was overlap in type of aid, eligible businesses, eligible uses, industry, geographic market, growth stage, loan or loan guarantee amount, and maturity term.

15 Public Sector Duplication of SBA Loan and Investment Programs 11 FINDINGS This research found that there is some overlap between the SBA s 7(a) and 504 programs. It also found that of the four SBA s programs studied here, the 7(a) program has the greatest amount of potential duplication at federal, state, and local levels. At all levels of government, there is less duplication of the SBIC program and even less of the MicroLoan and 504 programs. These findings are discussed in detail below. The Duplication Overview, we identifies the range of programs, from federal to local, available in certain states or cities. This analysis is useful in understanding the variety of options available to businesses in a given location. The Duplication Analysis by Program and Sector examines the four SBA programs and presents evidence of potential duplication at the three levels of government. This section also includes the comparison of the SBA s 7(a) and 504 programs. Duplication Overview This research suggests a small degree of potential duplication exists between SBA programs and similar programs run by other federal agencies, with most of the potential duplication occurring within SBA s 7(a) and 504 programs. Some overlap also exists with the programs offered through the USDA. Several federal agencies have grant programs that provide funds to states, local government, nonprofit organizations, and other groups that may use the assistance to offer loans or loan guarantees to small businesses. Because these programs are not explicitly designed to aid small businesses and because the grantees may not in fact use the funds to provide loans to small businesses, they are not included in the numbers in Table 4, but are detailed in Appendix C. A greater degree of potential duplication exists at the state and local level. Table 4: Public Sector Financial Assistance Programs for Small Businesses Source General-Purpose Loans/Loan Guarantees Loans/Loan Guarantees for Fixed Assets Only Micro- Loans Venture Capital Total Federal government State government Local government Total Note: These numbers include programs from all federal agencies (including the SBA), the 12 study states, and 12 study cities. The number for federal programs does not include 12 programs that provide grants to state or local governments or nonprofits that may use the funds to provide loans small businesses. The microloan program count does not include 20 programs run by nonprofit organizations that can be considered public, organizations with 50 percent or more of their total revenues from government grants

16 Public Sector Duplication of SBA Loan and Investment Programs 12 or contracts, as reported on the most recent (2004 or 2005) 990 IRS form available on guidestar.org. These programs are discussed in the section on state and local duplication of the MicroLoan Program. Most of the 12 study states and 12 study cities offer programs that have characteristics similar to SBA s 7(a) and SBIC programs; fewer states and cities have programs similar to 504 and MicroLoan programs. As shown in Table 4, these states and localities had a total of 79 programs potentially duplicating SBA s 7(a), 504, MicroLoan, and SBIC programs. See Appendix A for an analysis of the numbers in Table 4 by federal agency, state, and city. The SBA is the most significant source of federal financing for small businesses, although some financing is also available through other federal agencies, particularly for businesses in rural areas. Table 5 lists the federal assistance available to small businesses. It also includes programs providing assistance to businesses of all sizes because small businesses may benefit from a portion of these funds. These programs provide assistance in the form of loans, loan guarantees, microloans, and venture capital. The table distinguishes between general-purpose loans and loan guarantees (i.e., programs similar to the 7(a) program) and loans or loan guarantees that can be used only for real estate purposes (i.e., programs similar to the 504 program). The list below does not include programs that provide technical and planning assistance, but no financial assistance, such as the USDA s Rural Business Opportunity Grants. It also does not include the U.S. Department of Housing and Urban Development s (HUD) Community Development Block Grant or the U.S. Department of Health and Human Services (HHS) Community Services Block Grant. Some of these funds may go toward small business assistance, but because the decision is left to the recipients, these programs are discussed under state duplication. Table 4 also does not include federal grant programs--including programs through the Appalachian Regional Commission, Environmental Protection Agency, and U.S. Departments of Commerce, Transportation, and HHS--that provide funds to public bodies or nonprofits that may choose to lend the funds to small businesses. These programs are not included in the inventory because re-lending may be one of a dozen or more potential uses for the funds and therefore not a reliable source of federal funding for small business loans or investment. Furthermore, most of these grant programs are targeted at specific industries for specific purposes, setting them apart from SBA s programs. Our research found that states and localities provide a wide range of financial aid programs for small businesses. Some of the programs have conditions similar to SBA programs, and therefore could be considered duplicative, while others differ considerably in their terms and conditions. The greatest amount of potential duplication exists for the 7(a) program. In fact, many of the state programs were modeled on SBA s 7(a) program. As shown in Table 4,

17 Public Sector Duplication of SBA Loan and Investment Programs 13 the study states and cities are host to a total of 45 general-purpose loan or loan guarantee programs, compared to 5 real-estate specific loan or loan guarantee programs, 4 microloan programs, and 30 publicly funded venture capital programs. As shown in Table 6, all the study states and cities, except Florida, Houston, and Detroit, have some type of general-purpose loan or loan guarantee program. Table 5: Federal Financial Assistance Available to Small Businesses Federal Agency/ Program Small Business Administration General-Purpose Loans/Loan Guarantees to Firms Unable to Access Private Credit General-Purpose Loans/Loan Guarantees to Firms Able to Access Private Credit Loans/Loan Guarantees for Fixed Assets Only Microloans Publicly Funded Venture Capital Grants to Firms/ Lenders/ Public bodies/ Nonprofits 7(a) Loan Guarantee Program X 504 Program X SBIC Program X MicroLoan Program X Agriculture Department Business and Industry Loans X Empowerment Zones X Farm Loan Program Intermediary Re-lending Program X X Rural Business Enterprise Grants X Rural Business Investment Program X Rural Economic Development Loans and Grants X Appalachian Regional Commission Area Development Program X Commerce Department

18 Public Sector Duplication of SBA Loan and Investment Programs 14 Economic Adjustment Assistance X Environmental Protection Agency Capitalization Grants for Clean Water State Revolving Funds X Federal Agency/ Program General-Purpose Loans/Loan Guarantees to Firms Unable to Access Private Credit General-Purpose Loans/Loan Guarantees to Firms Able to Access Private Credit Loans/Loan Guarantees for Fixed Assets Only Microloans Publicly Funded Venture Capital Grants to Firms/ Lenders/ Governments / Nonprofits Capitalization Grants for Drinking Water State Revolving Funds X Health and Human Services Department Community Services Block Grant X Native American Programs X Indian Loans, Economic Development X Transportation Department Airport Improvement Program X Disadvantaged Business Enterprises Short Term Lending Program X Federal Transit / Capital Investment Grants X Formula Grants for Other Than Urbanized Areas X Treasury Department Bank Enterprise Award Program X Community Development Financial Institutions Programs X

19 Public Sector Duplication of SBA Loan and Investment Programs 15 Public sector microloan programs are less prevalent than loans and loan guarantees. States and localities may be more risk averse because they face strict fiscal restraints. These programs can also be costly to administer. Furthermore, the government programs face competition from microloan programs run by nonprofit organizations. One state, Florida, and three cities Miami, Boston, and Chicago offer microloan programs. All but three study states have nonprofit microlending organizations that receive a majority of their funding from government sources and could be considered public. As for programs similar to the SBIC program, all of the 12 study states have public venture capital funds, as shown in Table 6. As is discussed below, and detailed in Appendix E, some of these programs are publicly funded and publicly managed, while some are publicly funded and privately managed, the latter being more akin to SBICs. As Table 6 and Appendix D show, the availability of state and local financial aid to small businesses varies greatly across states and cities. No state has all types of assistance available directly to small businesses. Ohio is typical of the states with a wider array of programs. It has state-run general-purpose loan guarantee programs for both bankable and near bankable small businesses, in addition to a state program providing loan guarantees to very small businesses. Cleveland businesses also have access to a local microloan program, although only businesses able to meet conventional lending standards are eligible. The terms of Ohio s programs are comparable to SBA s. Ohio s Capital Access Program resembles the 7(a) program by targeting businesses unable to obtain private credit and prohibiting use for real estate investment. Size standards vary somewhat between SBA programs and the Capital Access program. The greatest difference between the two programs is the maximum amount allowable: Ohio s program guarantees loans up to $250,000 for working capital and up to $500,000 for fixed assets, compared to a $1.5 million maximum guaranteed by the 7(a) program. Small businesses with good credit seeking large, reduced-rate loans also have access to the Ohio State Treasury Department s Linked Deposit Program. Very small Ohio businesses with fewer than 25 employees that are unable to obtain private credit are eligible for the Ohio Mini-Loan Guarantee Program, which provides loan guarantees up to $45,000. Of the study states, Florida has the least amount of general aid available through staterun programs. It has no state-run loan or loan guarantee programs, and its economic development agency directs small businesses to SBA programs (Enterprise Florida 2006). However, it is one of the few states with a microloan program for small businesses: As shown in Appendix D, Florida s Front Porch Microcredit Loan Program provides loans up to $15,000 to start-up businesses unable to obtain private loans. The state also has a publicly funded and managed venture capital fund for technology businesses and a publicly funded, privately

20 Public Sector Duplication of SBA Loan and Investment Programs 16 managed venture capital fund. Presumably, a significant amount of the investment by these funds reaches small Florida businesses. Small businesses in Miami both those able and those unable to obtain private credit have access to city-run revolving loan programs. Rather than targeting small businesses per se, Florida s major state-run business finance programs target minority-run businesses, many of which may be small businesses. For example, the state runs the Florida Minority Business Mobilization Program, which provides payments to be used as collateral to businesses awarded state contracts. Minority-run businesses also have access to loans and venture capital through the quasi-public Florida Black Business Investment Board. Table 6: State and Local Financial Assistance Programs for Small Businesses State/City General-Purpose Loans/Loan Guarantees to Firms Unable to Access Private Loans General-Purpose Loans/Loan Guarantees to Firms Able to Access Private Loans Loans/Loan Guarantees for Fixed Assets Only Microloans Publicly Funded Venture Capital California X X Los Angeles X X San Diego X X Texas X X X Houston Dallas X New York X X New York City X Florida X X Miami X X Pennsylvania X X X X Philadelphia X * X Ohio X X X X Cleveland X X Massachusetts X * X X Boston X X New Jersey X X Jersey City

21 Public Sector Duplication of SBA Loan and Investment Programs 17 Illinois X X X Chicago X X X Michigan X X Detroit Maine X X X X North Dakota X X Note: States are ordered by loan activity. *The city of Philadelphia offers loan assistance through two private corporations. The loans are funded by federal, state, and local government sources and are usually leveraged with private debt and equity. The Massachusetts loan fund for businesses unable to access private credit, the Economic Stabilization Trust, is quasi-public. Houston is another interesting case, where little overlap with SBA programs appears to exist. The city runs no loan, loan guarantee, or microloan programs. This research found only four state or local program dedicated to fixed asset financing, and two of them are located in Maine. State and Local Programs Benefiting Businesses of All Sizes Most of the study states have public financial assistance programs that do not explicitly target, but that almost certainly have a substantial proportion of, small businesses among their beneficiaries. These include programs that target women and minorities, and those that are available to businesses of all sizes. Given that a large proportion of small businesses are women- or minority-owned, it is safe to assume that many of the loan and loan guarantee programs targeted at women and minorities are serving small businesses. Among the study states and cities, Florida, Ohio, Pennsylvania, and Philadelphia have bonding and loan discount programs for minorities. As discussed above, numerous state and local programs target distressed areas. Some state and local programs target special zones empowerment, empire, and enterprise zones or other distressed areas. Some programs are limited to small businesses, whereas others do not have such restrictions. Most states have public financing programs available to businesses of all sizes. Some small businesses may benefit from these, although small businesses that are unable to access private credit may face difficulty qualifying for these programs. Some states (e.g., New York, Florida, and Ohio) have bond programs that are generally used to fund large industrial projects. New Jersey and Illinois have several loan and loan guarantee programs that are open to all businesses. Other states including California and Pennsylvania have loan programs for specific uses, such as the replacement or improvement of underground storage tanks. Los

22 Public Sector Duplication of SBA Loan and Investment Programs 18 Angeles has two programs open to all businesses to finance machinery and equipment. Ohio uses some of its Community Development Block Grant money to issue Section 108 loans to businesses to fund machinery and equipment or real estate, but it does not specifically target small businesses. Pennsylvania and California also have loan programs for equipment or machinery and working capital. Chicago has several programs (including a microloan program with very broad eligibility standards) that do not explicitly target small businesses, but appear as if they would serve them. Because states and cities may be more risk averse than the Federal government, the financial assistance programs open to all businesses are more likely to serve larger businesses or ones with strong credit histories, i.e., those businesses that are able to access private credit. For example, Detroit has a revolving loan program that is open to all businesses. Among other things, proposed borrowers are evaluated on their impact on the local economy. Small businesses would be at a disadvantage because by their nature they are likely to have a smaller impact on the economy than large businesses. Lastly, quasi-public agencies are another potential source of financial assistance to small businesses. Programs run by these agencies (e.g., the Massachusetts s Citizens Job Bank, the Florida Black Business Investment Board, and the Philadelphia Commercial Development Corporation) are open to businesses of all sizes. Again, the assistance offered through these programs may be difficult to obtain for start-ups or other businesses that do not have strong credit histories. Duplication Analysis by Program and Sector Of the four SBA programs of interest, the 7(a) program has the greatest amount of potential duplication; there are a total of 6 programs at the federal level, 27 at the state level, and 12 at the local level that provide general-purpose loans or loan guarantees. Programs providing realestate-specific loans or loan guarantees (i.e., programs resembling the 504 program) or microloans are less prevalent. All of the study states have publicly funded venture capital programs resembling the SBIC program, as does the USDA. Section 7(a) Loan Guarantee Program Potential duplication exists at all levels of government for the 7(a) program, a general-purpose loan guarantee program. At the federal level, overlap exists between the SBA s 7(a) and 504 loan programs. Regulatory overlap is found within programs administered by the USDA, although SBA administrative data indicate that a small number and proportion of loans go toward the agriculture sector. At the state and local levels, the 51 general-purpose loan and loan

23 Public Sector Duplication of SBA Loan and Investment Programs 19 guarantee programs vary in their program characteristics, although they all serve the purpose of a making capital available to small businesses. Federal Duplication: Overlap Between SBA s 7(a) and 504 Programs The 7(a) and 504 programs were established to serve similar clientele, businesses unable to obtain private financing on reasonable terms, but with different purposes. The 504 program is intended to provide long-term financing for fixed assets only, particularly real estate, while the 7(a) program is intended to be used for purposes other than real estate, such as working capital, although fixed assets are an eligible use of proceeds under the 7(a) program. The two programs have similar eligibility requirements and size standards. The programs differ significantly in their interest rate and fee structure, maturity term, loan structure, maximum allowable amount, and type of lender. According to SBA district officials and state directors of Small Business Development Centers, the 504 program represents the best deal for long-term real estate loans because, as is discussed below, the interest rates are lower, the term is longer, and the equity requirement is lower than for 7(a) loans. As is also shown below, however, businesses use 7(a) loans for real estate purposes. The SBA and SBDC officials suggest that businesses are directed toward the 7(a) program not because it necessarily fits the businesses needs, but because the lender may have a greater level of comfort with one program or the other. Personal preference, relationships, and geographic location appear to play a large role in which loan program a bank or loan officer might recommend for a particular business. As shown in Table 8, the 7(a) program was originally authorized under Section 7(a) of the Small Business Act of 1958, 15 U.S.C., Chapter 14A, Section 636(a). This section was repealed August 13, 1981, and amended that year by Title XIX of Public Law The 504 program was authorized by Title V of Small Business Investment Act of 1958, 15 U.S.C., Chapter 14B, Sections 695 to 697. Both programs have a credit elsewhere criteria, which is defined under the SBA s Standard Operating Procedure (SOP) 50-10(4)(E) Subpart A.120 (U.S. Small Business Administration 2006b). This section reads: SBA provides assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-federal sources. SBA requires the Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non- Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar purposes and periods of time.

24 Public Sector Duplication of SBA Loan and Investment Programs 20 Both programs are available to the same business sectors and have very similar size and sales restrictions. In general, the criteria in Table 7 are used by SBA to determine if a concern qualifies as a small business and is eligible for SBA loan assistance. As shown below, these size standards vary depending on the industry sector of the business. The 504 program has a set of further size restrictions. To be eligible, a small business may not, together with its affiliates, have a tangible net worth in excess of $7.5 million or an average net income in excess of $2.5 million after taxes for the preceding two years. The two programs overlap in their restrictions on eligible use of proceeds. Proceeds from 504 and 7(a) loans can be used for the following: Acquire land (by purchase or lease); Improve a site (e.g., grading, streets, parking lots, landscaping), including up to five percent for community improvements such as curbs and sidewalks; Purchase one or more existing buildings; Convert, expand, or renovate one or more existing buildings; Construct one or more new buildings; Acquire (by purchase or lease) and install fixed assets (for a 504 loan, these assets must have a useful life of at least 10 years and be at a fixed location, although shortterm financing for equipment, furniture, and furnishings may be permitted where essential to and a minor portion of the 504 project). Table 7: Size Standards for 504 and 7(a) Loans Industry Group Manufacturing Wholesale trade Agriculture Retail trade General and heavy construction (except dredging) Dredging Special trade contractors Travel agencies Business and personal services Size Standard 500 employees 100 employees $750,000 in average annual receipts $6.5 million in average annual receipts $31 million in average annual receipts $18.5 million in average annual receipts $13 million in average annual receipts $3.5 million in commissions and other income $6.5 million in average annual receipts