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Thursday, July 5, 2012

State Small Business Credit Initiative: Implementation and Funding Issues

Robert Jay Dilger
Senior Specialist in American National Government

Congressional interest in small business access to capital reflects, in part, concerns about economic growth and unemployment. Small businesses, defined as having fewer than 500 employees, have played an important role in net employment growth during previous economic recoveries. However, recent data show that net employment growth at small businesses is not increasing at the same rate as in previous economic recoveries.

Some, including President Obama, have argued that current economic conditions make it imperative that the federal government provide additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.

P.L. 111-240, the Small Business Jobs Act of 2010, provided the Small Business Administration (SBA) additional funding and enhanced several SBA lending programs in an effort to assist small businesses access capital. The act also authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than $10 billion in assets to increase their lending to small businesses and a $1.5 billion State Small Business Credit Initiative (SSBCI).

The SSBCI provides funding, allocated through a statutorily created formula and distributed in one-third increments, to states, territories, and eligible municipalities to expand existing or to create new state small business investment programs, including state capital access programs, collateral support programs, loan participation programs, loan guarantee programs, and venture capital programs. In most instances, the initial round of funding (called a tranche) took place in FY2011. Depending on how quickly they spend, transfer, or obligate their funding, Treasury anticipates that most SSBCI participants will receive their second and third tranches in FY2012, and some will receive their second tranche in FY2012 and their third tranche in FY2013. SSBCI participants are expected to leverage their SSBCI funds to generate private financing and investment that is at least 10 times the amount of their SSBCI funds. Forty-seven states, American Samoa, the District of Columbia, Guam, the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and Anchorage, Alaska currently participate in the program.

During congressional consideration, advocates argued that the SSBCI would promote economic growth and job creation by enhancing small business access to capital. Opponents argued that the SSBCI did not address the need to stimulate demand for credit by small businesses, which, in their view, is the core issue affecting small business job creation during the economic recovery. They argued that “the solutions to America’s economic problems do not lie in more taxpayerfunded bailouts,” and advocated small business tax reductions as a more effective means to stimulate small business job creation and economic growth.

This report examines the SSBCI and its implementation, including Treasury’s response to initial program audits conducted by the U.S. Government Accountability Office and Treasury’s Office of Inspector General. These audits suggested that SSBCI participants were generally complying with the statute’s requirements, but that some compliance problems existed; Treasury’s oversight of the program could be improved; and performance measures were needed to assess the program’s efficacy.

Date of Report: June 28, 2012
Number of Pages: 22
Order Number: R42581
Price: $29.00

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