State Small-Business Programs Drying Up

By PlanetLaundry staff | Jul 06, 2010

A number of states have stepped in to help cash-strapped entrepreneurs get access to credit, primarily by providing incentives to banks to lend more.

But there's a problem: The programs have been so popular that many states – already operating under tight or depleted budgets – may have trouble meeting the demand.

In Colorado, interest from banks and their small business customers is "growing exponentially," said Cris White, executive director and chief executive of the Colorado Housing and Finance Authority, which administers the state's $2.5 million Credit Reserve program. "There is a likelihood that a year from now we could be out of money."

Through the program, Colorado banks can tap the state funds to bolster their reserves, making it less risky to extend credit to business owners. Nine lenders have jumped on board and have collectively drawn $300,000 from the program, allowing them to lend more than $3.6 million. White said about 250 small businesses would benefit by the time funds are exhausted.

Other states have programs with similar goals. Delaware allows business owners to use state funds to defer existing lines of credit for two years. In New York, business owners can get business counseling and then resubmit their previously rejected loan application to the "Credit for Success: Second Look" program. If it fits the underwriting standards, a group of local banks will pitch in to finance the loan.

In Maryland and New Jersey, the states partially guarantee eligible small-business loans so that the bank won't take the full loss if the borrower defaults.

The plight of the states' small-business programs was cited in a May report by the Congressional Oversight Panel, a watchdog for government bailout funds, which said states are severely constrained by tight budgets.

Declines in state spending for the fiscal 2009 and fiscal 2010 calendars were "unprecedented," according to a June report of state budgets from the National Governor's Association and the National Association of State Budget Officers. Forty states decreased expenditures for 2010, which the report attributes to declining tax revenues – about 12 percent since 2008 – from fewer sales and lower personal and corporate incomes.

Although the economy grew in late 2009, state finances can take months and sometimes years to recover, which may be particularly true in this recession given the high unemployment levels. For the 2011 fiscal year, state budgets may increase slightly, according to the report, totaling $635.3 billion. But that figure is still 7.6 percent below the $687.3 billion spent in fiscal 2008.