Federal Reserve Bank of St. Louis

05/12/2021 | News release | Distributed by Public on 05/12/2021 03:46

The American Rescue Plan Resurrected a Key Small-Business Financing Program

By Michael C. Eggleston, Senior Community Development Advisor

Community lenders will soon have the opportunity to help deploy funding from a revived federal program to the small businesses that need it. Changes to the newly reauthorized State Small Business Credit Initiative include funding targeted to businesses owned by socially and economically disadvantaged individuals.Here, 'socially and economically disadvantaged individuals' are defined by the Small Business Administration as follows: Socially disadvantaged individuals are those individuals who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities and the social disadvantage must stem from circumstances beyond their control. Economically disadvantaged individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.

After the Great Recession, many small businesses struggled to get access to credit. In response to that crisis, the State Small Business Credit Initiative, a component of the Small Business Jobs Act of 2010, was created. The SSBCI allocated $1.5 billion to states to support a variety of small-business financing programs.

While the initiative that was passed in 2010 (SSBCI 1.0) ended under a sunset date in 2017, the American Rescue Plan Act signed into law March 11 reauthorized it, while making some changes to the program and injecting it with an additional $10 billion. The new program (SSBCI 2.0) aims to complement other programs created through legislation over the last year, such as the Paycheck Protection Program, which has provided a lifeline to small businesses during the pandemic.

Community Development Financial Institutions Could Play an Important Role

The SSBCI allows states to tailor financing to best meet the needs of small businesses in their jurisdictions, including through debt programs (loan guarantees or loan participations, for example) and through venture capital programs.

Community development financial institutions, or CDFIs, focus on serving people in low- to moderate-income communities who might otherwise have a hard time obtaining credit. As mission-driven lenders, CDFIs are poised to play a key role in SSBCI 2.0, particularly given some of the changes made to the program. Among the changes is funding aimed at socially and economically disadvantaged businesses (PDF). The funding includes:

  • $1.5 billion for those businesses
  • $1 billion incentive allocation to states to encourage investment in those businesses
  • $500 million for small-business technical assistance, with priority given to socially and economically disadvantaged businesses

The U.S. Department of the Treasury is developing guidance on the implementation of SSBCI 2.0, including which businesses would qualify as socially and economically disadvantaged. The Council of Development Finance Agencies also created a SSBCI Resource Center, which is regularly updated with the latest SSBCI news and resources.

CDFIs Were Among Most Active Lenders in First Initiative

SSBCI 1.0 required states to target small businesses, design programs that leveraged private sector lending and investing, and develop a plan to target underserved communities, as a May 2018 policy brief from the St. Louis Fed's community development team explained.

Community banks, midsized banks and CDFIs were the most active lenders, accounting for 94% of all SSBCI-supported loans. CDFIs were integral lenders through the SSBCI 1.0, extending more than $630 million in loans and investments, of which 46% was deployed to small businesses in low- to moderate-income areas, according to the brief.

Additional information on the impact of SSBCI 1.0 can be found within the policy brief, as well as through an interactive data tool created to show the distribution of SSBCI funds and the lenders that participated in the program.

Note

1 Here, 'socially and economically disadvantaged individuals' are defined by the Small Business Administration as follows: Socially disadvantaged individuals are those individuals who have been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities and the social disadvantage must stem from circumstances beyond their control. Economically disadvantaged individuals are socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged.