Capital is the lifeblood of any businesses, but especially small businesses. Without adequate financing, through microloans, commercial lending, or investment capital, most entrepreneurs cannot start new businesses or grow their existing companies. Because access to capital is so critical for small business success, the Committee on Small Business and Entrepreneurship works to ensure that entrepreneurs are able to secure the financing they need. Obtaining capital can be especially difficult for start-ups and small firms that often lack the years in business or established credit history financial institutions may require prior to lending. In order to help small firms secure financing, the Committee works closely with the Small Business Administration (SBA) and the lending community to ensure that small businesses can obtain the financing they need.
The Committee oversees the SBA’s lending and investment programs. Delivered through private lending institutions with a government-backed guarantee to the lender, the SBA's 7(a) loan program provides the largest source of long-term working capital to small businesses in this country. The 504 loan program uses non-profit entities known as Certified Development Companies to provide long-term loans for fixed assets such as land, buildings and equipment. The microloan program - which proportionally helps more women and minorities than other loan programs - provides loans of $35,000 or less to entrepreneurs.
The Committee also oversees the Small Business Investment Company (SBIC) Program, which provides venture capital financing to small firms. The SBA partners with private investment firms, which the government backs through long-term loans so that they can leverage the money of private investors to provide small businesses with capital to grow their business and create jobs. SBICs differ from traditional venture capital firms in that they make smaller deals, between $250,000 and $5,000,000, and spread their investments more broadly around the country and a larger variety of industries.
The Committee has passed bipartisan bills to expand and improve all of these programs. To learn more about these programs, go to http://www.sba.gov/services/financialassistance/index.html. Additionally, the American Recovery and Reinvestment Act includes several small business related provisions, detailed below.
Background: The American Recovery and Reinvestment Act appropriates $730 million to improve existing SBA programs and create new initiatives that will address the current economic crisis. Below is a brief description of the most significant provisions.
Temporary SBA Fee Relief: As a result of the financial crisis and the recession, small business lending in the SBA’s flagship loan programs – 7(a) and 504 programs – is in a freefall. The bill allocates $375 million to allow for temporary waivers or reductions in the fees the SBA charges to lenders and borrowers in the 7(a) and 504 loan programs. When determining the amount and structure of the waivers/reductions, the bill requires the SBA to give borrowers and smaller banks priority in receiving fee relief.
Temporary Increase in SBA Guarantee Levels: The bill allows the SBA to temporarily raise the guarantee level up to 90% for 7(a) loans, other than loans made through the SBA Express program. The increased guarantee will provide a higher level of protection for risk-weary small business lenders who have tightened their lending standards considerably in the wake of the credit crunch.
Microloans: The bill appropriates $30 million for the SBA’s microloan program. The microloan program provides very small loans to qualifying micro-businesses (typically businesses with less than 10 employees) by making funds available to non-profit, community-based lenders – called intermediaries – which, in turn, make loans to eligible micro-borrowers in amounts up to $35,000. Borrowers are also provided with corresponding technical assistance to ensure that the loan proceeds are used effectively.
Small Business Venture Capital Stimulus: The bill attempts to stimulate the flow of venture capital in the SBA’s Small Business Investment Company (SBIC) program by simplifying the formula used to determine the maximum amount of SBA financing (“leverage”) available to SBICs. Among other improvements to the SBIC program, the bill also makes “transition” leverage available to commonly-controlled SBICs, which will allow successful SBICs to operate a second or third fund, while maintaining the safeguards necessary to mitigate the SBA’s risk in the investment.
Surety Bond Stimulus: As a result of the financial crisis, surety companies were often rejecting bond applications because the applicants (usually contractors in the construction industry) cannot show that adequate financing is in place to complete the project. The bill temporarily increases the SBA’s guarantee limit from $2 million to $5 million, and it appropriates an additional $15 million for the SBA’s surety bond revolving fund.
Oversight and Implementation of Stimulus Measures: In addition to the accountability board that will oversee the implementation of the stimulus package generally, the bill appropriates $10 million specifically for the SBA Inspector General’s oversight of SBA stimulus funds.