Overview of the State Small Business Credit Initiative

Summary

A handout dated February 13, 2024, titled Overview of the State Small Business Credit Initiative, presented to the Assembly Committee on Jobs, Economic Development, and the Economy and Assembly Budget Subcommittee No. 5 On State Administration. It describes unequal small business access to credit, the role of Community Development Financial Institutions, and five common types of public loan programs, along with the SBA 7(a) and 504 programs and USDA farm loans. It reports that California received $168 million under SSBCI 1.0 and was awarded $1.2 billion under SSBCI 2.0, which set a goal of spending at least 49 percent of funds to support SEDI-owned businesses. It lists the SSBCI programs run by IBank and CPCFA and closes with issues for legislative consideration, including meeting SEDI goals and the use of recycled funds.

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FEBRUARY 13, 2024




Overview of the State Small
Business Credit Initiative
PRESENTED TO:       Assembly Committee on Jobs, Economic
                      Development, and the Economy
                    Hon. Carlos Villapudua, Chair

                    Assembly Budget Subcommittee No. 5
                      On State Administration
                    Hon. Sharon Quirk-Silva, Chair




                                  L E G I S L AT I V E A N A LY S T ’ S O F F I C E
Businesses Have Unequal Access to Credit

    Small Businesses May Have Less Access to Credit. Lending to
small businesses generally is considered riskier, as they often have fewer
assets, less credit history, and less established business models. In addition,
evaluating a business’s creditworthiness is costly and the fees and interest
from a larger loan are more likely to offset these costs than a smaller loan.
    Racial Disparities in Business Lending. Research has found that
Black and Hispanic/Latino business owners face disproportionate challenges
accessing credits. They face higher denial rates and tend to be offered
smaller loans.
     Community Development Financial Institutions (CDFIs) Focus
on Lending to Underserved Communities. CDFIs are mission-based
private financial institutions that provide financial services to traditionally
underserved communities. There are 110 CDFIs across California.




L E G I S L A T I V E A N A LY S T ’ S O F F I C E                      1
Public Loan Programs

    Various Public Loan Programs Aim to Improve Access to Credit.
Federal and state loan programs make it easier and less costly for small
businesses to borrow money. There are five common types of public loan
programs.
     Loan Guarantee. A public agency works with participating lenders to
guarantee a portion of a business loan. If a borrower defaults on their loan,
the public agency pays the guaranteed portion of the outstanding balance.
     Loan Participation. A public agency directly lends money to businesses
in partnership with a private lender. Typically, a public agency purchases a
portion of a loan made by the lender or it makes a second loan to the same
borrower that is subordinate to the first loan.
    Collateral Support. A public agency pledges cash collateral for
borrowers that otherwise lack a sufficient collateral.
      Capital Access Program. A public agency insures portfolios of loans
made by one or more lenders. Whenever a participating lender makes a loan,
the borrower, the lender, and the public agency all add funds into a loan loss
reserve fund. In the event that a borrower defaults on their loan, the lender
files a claim to the loan loss reserve fund for the outstanding balance.
    Venture Capital Fund. A public agency may either directly invest in
a business or invest in other venture capital funds that, in turn, invest in
businesses.




L E G I S L A T I V E A N A LY S T ’ S O F F I C E                   2
Federal Government’s Role

     Federal Government Is the Primary Source of Support for Small
Business Lending. The federal government directly administers the most
widely used small business loan programs through the Small Business
Administration (SBA) and the U.S. Department of Agriculture (USDA). The
federal government also is the primary source of funding for a variety of state
loan programs.
    SBA Is Lead Federal Agency for Aiding Small Businesses. The SBA
administers a variety of programs to aid small businesses. Two major loan
programs administered by SBA are:
       „    7(a) Small Business Loan Guarantee Program. The 7(a) program
            typically guarantees 75 percent to 85 percent of a small business
            loan.
       „    504 Certified Development Company Loan Program. The
            504 program helps to provide long-term financing of real estate and
            heavy equipment.
    USDA Farm Loans Tailored to Needs of Agricultural Industry. The
USDA farm loan programs provide loan guarantees and direct loans to
farmers, ranchers, and other agricultural businesses.




L E G I S L A T I V E A N A LY S T ’ S O F F I C E                   3
State Small Business Credit Initiative

    Federal Program Funds State Lending Assistance Programs. The
federal State Small Business Credit Initiative program (SSBCI), created in
2010, provides flexible funding to states to develop state lending assistance
programs.
     SSBCI 1.0. $1.5 billion in SSBCI funding was allocated to states in 2010.
California received $168 million. Those funds have been committed but
continue to be recycled as loans mature.
     SSBCI 2.0. The federal American Rescue Plan Act allocated $10 billion
for an additional round of SSBCI funds to states. California was awarded
$1.2 billion.
     Goals to Support Socially and Economically Disadvantaged
Individuals (SEDI). SSBCI 2.0 rules set a goal for states to spend at least
49 percent of SSBCI funds to support SEDI-owned businesses. If California
does not meet this goal, it’s allocation would be reduced by $100 million.
    SEDI Designation Based on Voluntary Self Certification. Participating
businesses owners voluntarily certify that their access to credit is diminished
due to a variety of factors, including race, gender, veteran status, limited
English proficiency, or residence in an underserved community.




L E G I S L A T I V E A N A LY S T ’ S O F F I C E                 4
California’s SSCBI Programs

     SSBCI Provides Funding to Multiple State Programs. California’s
SSBCI funds are split evenly across two state agencies: the California
Infrastructure and Economic Development Bank (IBank) and the California
Pollution Control Financing Authority (CPCFA).
       IBank Programs. IBank administers two programs.
       „    Small Business Loan Guarantee Program.
       „    Venture Capital Program.
    CPCFA Programs. CPCFA currently administers two programs and
plans to launch a third, a loan participation program, soon.
       „    California Capital Access Program.
       „    Collateral Support Program.
       „    Loan Participation Program.




L E G I S L A T I V E A N A LY S T ’ S O F F I C E             5
Issues for Legislative Consideration

     Meeting SEDI Goals. Voluntary certification process appears to be
posing challenges for California meeting the federal SEDI goal. How can the
state ensure it meets this goal?
     Exploring Options to Further Expand Access During an Economic
Downturn. What options, if any, does the state have within federal rules to
further expand access to credit through SSBCI programs in the event of an
extend economic downturn?
     Considering the Use of Recycled Funds. Over the next few years,
some funds from SSBCI 1.0 and state funded loan assistance will be freed
up to be recycled into new assistance. Looking further ahead, beginning in
2030, the same will be true of SSBCI 2.0 funds. What is the best use of these
recycled funds?




L E G I S L A T I V E A N A LY S T ’ S O F F I C E                6


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