New Systems for Small Business Capital Campaigns
The ability of a small business to survive and recover from the Coronavirus (COVID-19) Pandemic will depend to some degree on their ability to be selected as a ‘winner’ – the recipient of money from investors, their community, a charity and/or the government. Without funding to pay the bills and then to implement a plan, businesses are prone to failure.
What is a winner? In short, a ‘winner’ is any small business that obtains money. A longer answer will be a small business that fits into a category that meets the criteria of a picker. The criteria may be as simple as a pre-existing relationship between the small business and the picker or as complicated as startup farmer in a rural area owned by a minority individual. A significant percentage of small businesses may not fall in any favored category.
The question is presented as to “What are the characteristics of a small business that will compete best for scarce resources at the start of an economic recovery?” This topic will be expanded upon in a later posting.
What is a loser? In short, a ‘loser’ is any small business that does not obtain money. The failure The label sounds harsh, but it is a reality in the context of access to capital. The small business has not done anything wrong. It simply is the result of not falling within a group of small businesses selected to receive funding.
What is a picker? A picker is an individual or organization that controls the money and makes the decision on where to invest/grant/distribute money.
Using the SBA Economic Injury Disaster Loan program, the SBA is the picker. The SBA picked everyone to receive the Advance Loan/Grant in the amount of $1,000 per employee. On the balance of the loan, the decisions will be made by SBA loan officers using criteria and limits set by law and policy. Further selection was made by Congress by authorizing a limited amount of money for the program. This has resulted in a ‘first to apply’ consequence. It is unknown at this time what percentage of all small businesses applied and what percentage were declined. It is also unknown at this time what percentage of the requested money was loaned.
Using the Paycheck Protection Program, approved lenders are the pickers. These lenders gave priority to their existing customers. Even higher priority was often given to those customers who had already borrowed money which default would be harmful to the lender’s bottom line. Not all banks were approved. All lenders that were approved, both big and small, had the same ability to make these loans. Like the Economic Injury Disaster Loan program, further selection was made by Congress by authorizing a limited amount of money for the program.
With additional disaster relief coming, a battle is already occurring in Congress on picking the ‘pickers’. The Republicans efforts to add funding to the EIDL and PPP was blocked, in part, by the Democrats seeking to have more community banks as ‘pickers’. Many smaller banks in both urban and rural communities were unable to serve their customers with these two programs and may be limited in their ability to work with future programs.
The New Mexico State Investment Council directed investments into small businesses with a minimum of 40 employees. https://sunmountaincapital.com/new-mexico-recovery-fund/ Sun Mountain Capital is the ‘picker’. The amount of money available to the Council was set by the New Mexico legislature. The New Mexico legislature was elected by the citizens of the State.
Everyday, more programs are being established by state and local governments, businesses, investment groups, foundations and other organizations. Each of these programs is making ‘picks’ where they set the criteria for who receives money and who does not.
The result of all these ‘picks’ does not assure that every small business will be eligible to obtain money whether it is in the form of loan, grant or equity investment. Even if eligible, a small business may lack the time, money or knowledge to get in line before the money runs out.
Small businesses should voice their preferences to their elected officials, government agencies, business and industry associations and community organization over the selection of future ‘pickers’ and the criteria they must use in picking small businesses for funding.
Small business should be aware of funding programs for which they qualify and make an application before funding runs out.
The Council of Development Finance Agencies (CDFA) is advocating to reauthorize funding for the State Small Business Credit Initiative (SSBCI) Program. https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/SSBCI.html?open§ion=SignOn#SignOn This program was highly successful during the Great Recession in making individual States the ‘pickers’ for local programs.
The Freelancers Union seeks funding to go into an expanded unemployment insurance program where self-employed, freelancers and Gig workers may receive income from State programs where they did not previously pay taxes. https://blog.freelancersunion.org/2020/03/26/stand-up-for-freelancers-affected-by-coronavirus/
Picking ‘pickers’ will be a very important topic for the near future.
All small businesses, economic developers and community leaders are invited to participate in the Small Business Pandemic Survival & Recovery Webinar series where I will discuss this and other topics. The next event of this series will be held at 9 am MDST (Denver time) on Thursday, April 16th on the Knowledge Avatars platform. Anyone can attend the Webinar without charge at: https://knowledgeavatars.com/Pandemic_Survival_and_Recovery_Webinar
Karl Dakin, Executive Director and Economic First Responder
Capital Innovation & Technology Institute LLC