Governments are rolling out new loan programs to help local small businesses struggling for survival during the COVID-19 crisis. What will make these loan programs effective?
Lessons learned from the State Small Business Credit Initiative (SSBCI)* tell us:
Program design should reflect current economic realities and local capital needs. This implies that replicating programs designed for the Great Recession may not be right for the “Great Cessation” because the underlying economic effects are different.
Incorporate input from lenders into the design process. Engage community banks and community development finance institutions (CDFIs) to determine appropriate program features and increase lender interest in participation.
Build in flexibility. Small business needs are likely to evolve, so be prepared to modify programs and reallocate funds in response.
Be mindful of leverage ratios. Government small business programs may require a company match or other private capital contributions. Under the SSBCI program many states ended up lowering their target leverage ratio over time from initial targets of 20:1 to 6:1 or less. A 2016 program evaluation suggested this may be a good benchmark for future lending programs, one “that reflects what banks and other lenders require to address the credit gaps associated with otherwise creditworthy borrowers.”
Operations and Compliance
Choose partners carefully. To move quickly, it is best to build from existing partnerships connected with legacy financing programs. However, there is also an opportunity to experiment with new partners and delivery systems to expand program reach.
Engage in continuous and consistent marketing. Marketing and outreach often get short shrift in government programs. But businesses need to know about the program if it is going to be helpful. Collaborate with lender and small business networks, such as state bankers’ associations, small business development centers, regulatory agencies, economic development websites, etc.
Underserved communities require special attention. Underserved communities, by definition, may not be well-connected to the networks described above. Identifying networks already connected to the targeted communities, offering technical assistance through mission-oriented intermediaries, and incorporating specific goals for targeted lending were tactics found to improve SSBCI performance in underserved communities.
Make the application process easier. The SSBCI evaluation found that successful capital access programs reduced paperwork by allowing lenders to use their own forms and closing documents, minimized the need for re-underwriting of credit decisions, and reduced the time for processing loan applications made through lending partners. We would add that many government small business loan applications require absurd amounts of documentation for small amounts of money. This is a good time to streamline standalone applications to focus on the essentials.
* Source: Program Evaluation of the US Department of Treasury State Small Business Credit Initiative, prepared by the Center for Regional Economic Competitiveness and Cromwell Schmisseur, 2016.