State and local Government programs in small business financing

Besides the special small-business financing programs of the federal government, there are many special financing programs offered by the states and local city and county governments.

These programs are intended to simulate the growth of small businesses and the jobs they create in the sponsor’s jurisdiction. State and local governments know that a vibrant small business sector is essential to maintaining the economic health of their economy and the tax base that supports the government.

State and local programs cover a wide range of needs. They include subsidized loan programs, direct equity investment, tax credits and deductions, and direct grants. The particular program may be targeted at a specific industry, a specific asset class such as manufacturing plants, or may be available to a full spectrum of small business. Most states have some form of economic development agency or finance authority that makes loans or guarantees loans to small business. In addition, many state commerce departments have direct or participating loan programs that may be even more attractive than the SBA-guarantee program. Furthermore, there are often specialized programs designed to help women and minorities.

Case in Point — Virginia: Because of the large number of programs across the 50 states, this Case in Point will review the programs available in Virginia, as an example of the programs available at the state and local level. The Virginia Capital Resources Directory, published by the Virginia Department of Business Assistance, lists more than 70 federal, state, and local government programs available to support Virginia’s small businesses. Other states have similar directories.

Virginia is typical of most states in having both programs that provide direct aid to the small business owner and that try to leverage existing federal programs. It is also typical that Virginia uses the existing financial system, particularly commercial banks, to deliver its programs. And, Virginia is also characteristic in its program of funding nonprofit organizations that in turn help small business.

Most of Virginia’s small-business financing aid programs are delivered through the Virginia Small Business Financing Authority (VSBFA), an agency of the Commonwealth of Virginia’s Department of Business Assistance. The major small-business financing programs supported and managed by the Virginia Small Business Financing Authority include:

  • The Industrial Development Bond Program
  • The Loan Guarantee Program
  • The Economic Development Loan Fund
  • The Virginia Capital Access Program

The Industrial Development Bond Program arranges for the issuance of tax-exempt industrial development bonds to fund construction of manufacturing facilities for small businesses. A business may raise up to $10,000,000 for a specific facility under this program. The bonds are issued by either the Virginia Small Business Financing Authority or a local industrial development authority within Virginia. The bonds are issued for a specific company, which receives the proceeds of the bonds and is obligated to repay the bonds. The VSBFA or the local industrial development authority guarantees the bonds.

The Loan Guarantee Program guarantees part of a loan or line of credit from a bank to a qualified small Virginia business. Under the program, the guarantee is no more than 75 percent of the loan or line of credit to a maximum of $300,000. The business applies to the bank for the loan, which in turn requests the guarantee from the VSBFA if the small business would not qualify under the bank’s normal credit criteria.

The Virginia Economic Development Loan Fund combines federal funding with state funding to help small businesses. The fund uses a combination of funds from the federal Economic Development Administration and the Commonwealth of Virginia. A company building a manufacturing facility in the state can receive up to $1 million and 40 percent of the project cost from the fund.

The Virginia Capital Access Program provides support for banks that lend to high-risk small companies. It insures a portfolio of these loans against loss. The program provides a higher than normal loss reserve for the portfolio, which is paid for by premiums charged to a combination of the borrowers and the VSBFA.

This list of Virginia’s small-business financing programs is a sample of the programs available across the country. To find out about similar state and local government programs in your home state or local jurisdiction, you should contact your state’s department of commerce or business, the local chamber of commerce, or the local economic development office. Alternatively, you could contact the local office of the Small Business Administration, which normally has information on state and local government programs operating in its area.

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