#GEWPolicy Spotlight: Lessons in Designing National Incentives for Local Financing Innovations
Senior GEN Advisor Dane Stangler looks at the U.S. State Small Business Credit Initiative and lessons that can be applied to government programs leveraging public dollars to catalyze private financing.
Dane
Stangler
12 Nov 2021

This article is part of a Global Entrepreneurship Week (#GEW2021) series putting a spotlight on policies designed to help entrepreneurs start and scale, and the crucial role policy makers play in building a strong entrepreneurship ecosystem.

December 2021 is the deadline for U.S. states to apply to the federal government for funding under a program called the State Small Business Credit Initiative (SSBCI). By some estimates, all eligible states and territories notified the Treasury Department in May of their intent to apply.

So, what is the SSBCI? And why are U.S. states so keen to apply for funding from it?

The State Small Business Credit Initiative received funding through passage of the American Rescue Plan (ARP) in March 2021. This is the second iteration of the program. Congress created the first in 2010 as part of the ongoing response to the 2007-09 Great Recession and its severe effects on small businesses and entrepreneurs.

In 2010, the U.S. Treasury allocated around $1.5 billion through the program to states to support small business financing. When applying for funds, states detailed how they would leverage private-sector financing, with an ambitious 10:1 ratio as the goal. From 2011-2016, federal funds were distributed directly to states to support programs they conceived and designed.

The second round of SSBCI, or SSBCI 2.0 as some of have dubbed it, greatly ups the ante. The ARP allocated $10 billion this time around, a nearly tenfold increase.

Is the higher amount justified? An evaluation for the U.S. Treasury Department in 2016 found positive effects from the first iteration of the program. States reached an 8:1 leverage ratio, with programs supporting “nearly $8.4 billion in new capital in small business loans and investments by the end of 2015.” The evaluation also found that eight out of 10 SSBCI transactions involved the smallest and youngest businesses. The program also helped provide capital to small businesses and entrepreneurs in low and moderate income areas. Such outcomes are encouraging and helped lay the foundation for the higher-priced renewal.

Notably, the context for the program in 2021 is far different than in 2010, when SSBCI was originally created. A decade ago, small businesses lending contracted sharply and did not recover for several years. SSBCI 1.0 served a key role by filling the gap and incentivizing private lenders to re-enter the market. It also helped catalyze a good deal of local innovation.

The landscape is different today. Small businesses were hit extremely hard during the COVID-19 pandemic by government lockdowns and consumer fear. In the spring months of 2020, tens of thousands of American small businesses closed for good. The U.S. federal government stepped in with assistance, providing around $1 trillion in small business support through different loan programs. Many of those loans, through forgiveness, ended up being grants to small businesses.

It will not be clear for many years whether SSBCI 2.0 will have the same effects as its predecessor. Nevertheless, there are clear lessons that emerged from the first SSBCI that can and should be applied not only to the current version but also to any government program that seeks to leverage public dollars to catalyze private financing. Dozens of countries have similar efforts—with many new ones created during the pandemic—and can learn from the highly localized financing innovations that SSBCI inspired.

The Nowak Metro Finance Lab at Drexel University has published an overview of lessons learned from the first SSBCI. These takeaways are straightforward but must be heeded for ultimate success in any such public financing scheme.

  • Tap into existing networks of capital providers.
  • Stand up new networks.
  • Create new, evergreen funds.
  • Provide wrap-around services.
  • Develop innovative public-private funds.

To these useful lessons, I would add a few more for governments across the world as they consider the future of their public finance schemes and incentives for the private sector.

First, governments should seek rigorous evaluation of past and present programs. This simply isn’t done enough or, when done at all, done well. In addition to asking “what went right” with programs, public leaders must push the question, “what went wrong?” Bring in partners to help with evaluation, and also program design and implementation.

Second, take a lesson from management scholars and look to reduce “frictions” where you’re adding “fuel.” Part of the reason so many public venture schemes fail is that policymakers pour in money without reducing policy barriers to make that money effective. No matter how much money a government puts into a public venture capital program, it will have limited effectiveness if, for example, restrictions on entrepreneurial mobility aren’t reduced.

Lastly, be content with the small, in both deployment and deals. The Nowak report underscores the importance of “localizing” such efforts. Entrepreneurial ecosystems are rooted in place; national government dollars should rely on local insight and knowledge as much as possible in these financing programs.

Small deals are ok, too. The temptation for policymakers is to put in large sums of money and push for large financing deals, with lots of zeros. Spreading that money across many smaller deals will raise the probability of successful outcomes.

The Global Entrepreneurship Network looks forward to working with partners at every level across the world to understand the effects of public entrepreneurial financing schemes.

Dane Stangler

Senior Advisor | Global Entrepreneurship Network

Dane Stangler is a senior advisor to the Global Entrepreneurship Network where he helps ensure that resources spent on new policies and programs… More