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Public Sector Duplication of Small Business Administration Loan And PUBLIC SECTOR DUPLICATION OF SMALL BUSINESS ADMINISTRATION LOAN AND INVESTMENT PROGRAMS: AN ANALYSIS OF OVERLAP BETWEEN FEDERAL, STATE, AND LOCAL PROGRAMS PROVIDING FINANCIAL ASSISTANCE TO SMALL BUSINESSES Final Report January 2008 Prepared for: U.S. Small Business Administration Prepared by: Rachel Brash The Urban Institute 2100 M Street, NW ● Washington, DC 20037 Public Sector Duplication of Small Business Administration Loan and Investment Programs: An Analysis of Overlap between Federal, State, and Local Programs Providing Financial Assistance to Small Businesses Final Report January 2008 Prepared By: Rachel Brash The Urban Institute Metropolitan Housing and Communities Policy Center 2100 M Street, NW Washington, DC 20037 Submitted To: U.S. Small Business Administration 409 Third Street, SW Washington, DC 20416 Contract No. GS23F8198H UI No. 07112-020-00 The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Public Sector Duplication of SBA Loan and Investment Programs i CONTENTS INTRODUCTION ..........................................................................................................................1 BACKGROUND............................................................................................................................2 Definition of Duplication ...........................................................................................................2 Program Overviews .................................................................................................................3 2.2.1 Section 7(a) Loan Guarantee Program ....................................................................4 Certified Development Company (504) Loan Program .....................................................5 MicroLoan Program...........................................................................................................5 Debenture Small Business Investment Company (SBIC) Program ..................................6 METHODOLOGY .........................................................................................................................7 FINDINGS...................................................................................................................................11 Duplication Overview .............................................................................................................11 State and Local Programs Benefiting Businesses of All Sizes .......................................17 Duplication Analysis by Program and Sector.........................................................................18 Section 7(a) Loan Guarantee Program ...........................................................................18 504/CDC Loan Program..................................................................................................39 MicroLoan Program.........................................................................................................43 SBIC Program .................................................................................................................45 CONCLUSION............................................................................................................................47 REFERENCES ...........................................................................................................................49 Public Sector Duplication of SBA Loan and Investment Programs ii INDEX OF TABLES Table 1: SBA Program Overview ..................................................................................................4 Table 2: Study States....................................................................................................................8 Table 3: Study Cities.....................................................................................................................9 Table 4: Public Sector Financial Assistance Programs for Small Businesses............................11 Table 5: Federal Financial Assistance Available to Small Businesses .......................................13 Table 6: State and Local Financial Assistance Programs for Small Businesses ........................16 Table 7: Size Standards for 504 and 7(a) Loans ........................................................................20 Table 8: Comparison of 7(a) and 504 Loan Program Attributes .................................................21 Table 9: Use of Proceeds by Firms Receiving 7(a) Loans Only, 1997–2005 .............................24 Table 10: Average Loan Amount for Firms Receiving 504 and/or 7(a) Loans, 1997–2005........24 Table 11: Average Maturity Term (in months) and Interest Rate, 1997–2005............................25 Table 12: Comparison of Ownership and Firm Characteristics for Recipients of 7(a) and/or 504 Loans, 1997–2005....................................................................................27 Table 13: Comparison of Industry for Recipients of 7(a) and/or 504 Loans, 1997–2005 ...........28 Table 14: Comparison of Business Location for Recipients of 7(a) and/or 504 Loans, FY 1997–2005............................................................................................................29 Table 15: Nonprofit Microenterprise Programs ...........................................................................45 Public Sector Duplication of SBA Loan and Investment Programs 1 INTRODUCTION This study investigates government programs that provide assistance similar to the assistance provided through SBA’s 7(a) Loan Guarantee, 504 Loan, MicroLoan, and Debenture Small Business Investment Company Programs: that is, programs that potentially “duplicate” or “overlap” with SBA’s programs. The study was conducted using SBA administrative data, on- line research, and conversations with SBA district staff and Small Business Development Center officials. The research found that at the federal level some potential duplication exists between SBA’s 504 and 7(a) programs: between 1997 and 2005, almost half of the loan volume to firms receiving only 7(a) loans—which can be used for working capital, equipment, and real estate—went toward real estate, despite the fact that the 504 program provides loans exclusively for fixed assets, typically to finance real estate purchases. The research also found that although several federal agencies have financial assistance programs for small business, the SBA is the most significant federal source of financing for small businesses not in rural areas. The U.S. Department of Agriculture (USDA) appears to be the primary provider of loans and loan guarantees for small businesses in rural areas. A greater amount of potential duplication exists at the state and, to a lesser extent, local level. This duplication exists for the most part among federal, state, and local general-purpose loan and loan guarantee programs that resemble the SBA’s 7(a) program. There are fewer state and local loan and loan guarantee programs that resemble the 504 program, which provides loans exclusively for fixed assets, typically to finance real estate purchases. Few states or localities run microloan programs, though a handful of nonprofit microenterprise organizations receiving a majority of their funding from government sources (i.e., “public” nonprofits) have loan programs. It appears that many states rely on local and national “public” and private nonprofit organizations—in addition to the SBA—to provide businesses with small loans. All of the study states have state-run or state-funded venture capital programs, but these state programs focus much more heavily on technology, science, and healthcare than the debenture SBIC program does. The extent of similarities among federal, state, and local loan and loan guarantee programs varies by state and program. In general, SBA programs have higher maximum loan and loan guarantee amounts and longer terms than state and local programs. Size standards are similar for SBA, state, and local programs, although a few study states and localities have size standards considerably smaller than SBA standards. Standards for industry sector, geographic market, and growth stage are similar for SBA programs and state and local programs. Whether a business chooses a state or local program instead of an SBA program— or whether a bank decides an applicant should apply for a particular program—may be Public Sector Duplication of SBA Loan and Investment Programs 2 influenced by factors such as credit history, differences in fees, interest rates, amount of paperwork required, job creation requirements, or prevailing wage standards. The next section discusses the issue of duplication and provides a description of the four SBA programs of interest. Section III presents the study methodology, which explains how chose the state and city samples were selected, and what program characteristics were used to assess whether overlap exists. The findings section is divided into two subsections: one that provides an overview of the array of loan and loan guarantee programs within states and localities, and one that provides an analysis of the duplication between the SBA’s 504 and 7(a) programs and of each of the four programs at the federal, state, and local levels. Because the greatest amount of duplication exists among state and local general-purpose
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