Since the start of the COVID-19 pandemic, small business has served as the focal point of relief efforts, from the earliest local relief funds and the Paycheck Protection Program, to a total of $1 trillion in relief disbursed by the Small Business Administration. These funds, though enormous in volume, exposed the deficiencies of our existing capital systems when it comes to serving small and marginalized entrepreneurs and enterprises.

The need for small business support — and innovation in financial products — is ongoing. In the 2022 Small Business Credit Survey, 48 percent of employer firms report a decrease in revenues into 2021, well above pre-pandemic levels of 22 percent. Like the initial impacts of the pandemic, these struggles fall along racial lines, with Black, Asian, and Hispanic Americans the most likely to report their firms are in “fair” or “poor” financial position.  While economists debate forecasts of a 2023 recession, some claim it’s already here for main street businesses.

Changing Small Business Capital Access – SSBCI 2.0’s raison d'etre

Enter the State Small Business Credit Initiative (SSBCI). As written in Next City and highlighted in our primer, SSBCI, “The Most Important Small Business Program You’ve Never Heard of,” is 1) a critical (albeit unheralded) piece of federal funds and 2) a harbinger for change in our capital access landscape. The importance and reach of this program have led us at the Nowak Lab to partner with the Kauffman Foundation to build an SSBCI Community of Practice to generate best practices and models for effective implementation.

SSBCI, initially part of the Great Recession arsenal in 2010, was rebooted in the American Rescue Plan Act of March 2021 to ensure a long tail of capital access for small businesses recovering from the pandemic. If the purpose of the first iteration of SSBCI in 2011 was to unlock tightened credit markets coming out of the Great Recession, SSBCI 2.0 is intended to support historically excluded entrepreneurs, overlooked geographies, and necessary industries of the future in climate tech and domestic manufacturing. 

In the indelible words of Della Clark, President of The Enterprise Center, “capital only flows where it knows.” SSBCI 1.0 was aimed at reopening drying capital channels; SSBCI 2.0 aims to change where it reaches altogether.

With success, SSBCI could remedy the same capital systems that failed (or didn’t exist) to deliver relief at the height of the pandemic and laid bare the urgent need for improvement; it creates an opportunity to build a new and more equitable system for capital access across communities, delivering on multi-billion dollar commitments from institutions following the murder of George Floyd.

With its $10 billion magnitude and reach across states, Tribal governments, and territories, SSBCI can also unlock and scale innovative small business financing products to reach more entrepreneurs, as we showcase in the Innovative Finance Project. These innovations can dovetail with SSBCI to create new channels for capital to flow, including climate investments targeted under the Inflation Reduction Act (IRA), diverse suppliers needed to fulfill contracts under the Bipartisan Infrastructure Law (BIL), and necessary supportive small firms and industries needed for domestic manufacturing, buoyed by the CHIPS and Science Act.

SSBCI – and, more specifically, American entrepreneurs — can do all of this, but we need to build the small business support delivery system to make it so.

Current State of Implementation

Implementation of the $10 billion SSBCI program has been an ongoing process for nearly two years, with every state, territory, and Tribal government eligible to receive funds from the U.S. Treasury for a variety of capital programs.

To date, Treasury has approved SSBCI programs in 38 states for a total of $6.3 billion, to be deployed over the next several years. States are now actively investing capital or looking for partners, especially to help them target SEDI-owned (Socially and Economically Disadvantaged Individual) businesses to meet SSBCI program targets.

50 States, 50 Delivery Systems

SSBCI highlights our current lack of a cohesive small business delivery system, as we’ve spotlighted before. This differs sharply from policy areas like transportation or housing, where funds flow downwards from specialized federal agencies to their state and local counterparts that look largely the same across places. Our federalist fragmentation creates challenges for national-level policy initiatives to support small business and, in turn, ideas looking to advance the field.

A review of SSBCI programs reveals that no two states are the same.  States differ in three fundamental areas:

            The “who”: which entities oversee SSBCI programs;

            The “what”: stated priorities for products, sectors or entrepreneurs; and

            The “how”: structures to deliver capital from states to entrepreneurs.

While all jurisdictions share similar broad objectives for SSBCI, as codified in the American Rescue Plan – to accelerate small business recovery from the pandemic, prioritize SEDI firms and entrepreneurs, and crowd-in private capital with SSBCI dollars – the commonalities end there.

Reviewing the who, what, and how reveals much about our current state of small business and the direction of the economy at large, carried out below.

The Who: SSBCI Implementing Entities

Jurisdictions have a vast range of entities with authority for administering and overseeing SSBCI programs, from strictly government departments to semi-public entities with varying governance structures, often coordinating with implementing and contracted entities, tasked with overseeing investments and reaching entrepreneurs.

A glance through Treasury’s list of publicly announced SSBCI programs reveals the huge variety of entities involved in supporting small businesses. Among the 38 approved states, we count more than 60 different implementing entities of vastly different types, empowered by states to administer SSBCI programs. Implementing entities include public agencies like state commerce, economic development, housing, and community development agencies. They also include the California Pollution Control Authority, quasi-public investment entities such as Connecticut Innovations and MassVentures in Massachusetts, a Small Business Development Center in Alaska, the University of Minnesota, economic development districts in Idaho, and fully private contracted entities like the NC Rural Center in North Carolina.

The What: State SSBCI Strategies

The various kinds of investments being prioritized, from microlending to venture deals, map onto different policymaking priorities – the size, sector, and industry strategies of states and corresponding trade-offs (e.g., should the state pursue a main street strategy over biomedical innovation – and by how much?).

Some states are all-in on high-growth innovation. Among states with approved SSBCI programs, six – North Dakota, New Mexico, Louisiana, Arizona, Virginia, and Indiana – have dedicated at least 70% of their SSBCI allocations to venture capital or equity programs, investing in high-growth sectors like technology and life sciences. West Virginia, which currently has no locally-based venture capital funds, has allocated more than half of its allocation to equity investments to kick-start the high-growth economy there. While such a strategy can launch a new innovation ecosystem or accelerate a nascent one, it can come at the expense of supporting more Main Street, local-serving firms.

Other states are using their SSBCI allocations to support specific sectors or industries, including the green economy, manufacturing, infrastructure, and sectors of strategic significance to the state. Green economy SSBCI strategies are taking shape in at least four states: Connecticut, Hawaii, Illinois, and Nevada. Illinois is using SSBCI funds to establish a new Climate Bank program, while Nevada, whose state legislature authorized a C-PACE program in 2021, is doubling down on climate-focused investments with its Climate Finance program to spur small business investments in energy efficiency.

In states like Michigan, Minnesota, and Iowa, among others, manufacturing is a priority for SSBCI programs. Iowa’s Manufacturing 4.0 loan participation program aims to assist manufacturers accessing advanced automation and robotics technology to improve productivity in the sector. New York is building off its successful Bonding Assistance Program, which helped contractors gain access to surety bonds in SSBCI 1.0, by continuing the program in SSBCI 2.0 and introducing the $22 million New York State Contractor Financing Program, both of which aim at helping small firms tap into opportunities created by the BIL.

Others are leaning into areas of strategic significance to the state. Alaska’s programs aim to support small firms in the fisheries and maritime industries, while Maine’s $22 million loan participation program prioritizes firms in sectors identified in the state’s economic development plan such as forestry and the blue economy.

Finally, states have adopted strategies to support overlooked regions and entrepreneurs. Although California, New York, and Massachusetts have historically received about 75% of all venture capital in the U.S., that investment has largely been concentrated in superstar regions (San Francisco/Los Angeles, New York, and Boston, respectively) and in founding teams dominated by white men. All three states are using SSBCI programs to expand equity/VC activity outside of these regions, and, along with states like Maryland, Connecticut, and Pennsylvania, to support marginalized entrepreneurs and fund managers.

The How: Capital Distribution Approaches

The “how” relates to the outreach and business services needed to build investment pipelines and deliver capital to intended beneficiaries. In designing their capital delivery structures, states have considered opportunities to build on strengths, bridge gaps, and “muscle up” existing entrepreneurial ecosystems.

While the “what” sets priorities, the “how” actually delivers. Among approved programs, we see three types of SSBCI capital distribution strategies.

The first approach is widespread, regional distribution of SSBCI decision making and capital among existing entities and programs. In Pennsylvania, for instance, about half of the state’s SSBCI funding will flow through the Ben Franklin Technology Partners and Life Sciences Greenhouses, a network of seven quasi-public regional entities that make equity investments in emerging companies in sectors like technology and life sciences. The majority of the remaining funds will flow through the state’s CDFIs and Certified Economic Development Organizations (CEDOs) – a mix of SBA lenders and public or quasi-public local authorities – through a revolving loan fund program.

Next are states with more centralized approaches to distributing SSBCI capital. A number of states, like Arizona, Missouri, North Dakota, and South Dakota, are taking this approach. North Dakota, for instance, is operating a single SSBCI program in which the state’s Department of Commerce will make direct equity investments in companies. In Arizona and Missouri, SSBCI authority is relatively centralized in the Arizona Venture Development Corporation and the Missouri Technology Corporation, respectively. This approach enables states to strengthen entities like AVC and MTC and to strategically target investments within the state.

Finally, other states are leveraging SSBCI to push authority downward and strengthen or establish new capacities at the local level. Montana, for instance, is devoting its entire $61.3 million SSBCI allocation to a single loan participation program, building on a support network  for local loan funds originally set up decades ago. NetWork Kansas, a state-created nonprofit organization, is “importing decision-making” for a portion of its $42 million GROWKS Loan Fund to its local E-Communities, a network of 69 local capital providers distributed throughout the state to strengthen entrepreneurial ecosystems and establish local loan funds. Although the first E-Communities are now more than 15 years old, the state’s SSBCI 2.0 allocation accelerates capital deployment by leveraging local teams’ leadership capacity for the first time.

Ensuring connections between capital and business support services – for which SSBCI 2.0 provides $500 million – will be a critical element in designing effective delivery systems. Providing effective small business support requires hyper-specific, firm-level connections, not often the charge of state governments. This presents an acute challenge for SSBCI. In the end, we expect the contractors for capital and support services to include a full range of partners, as we note in the National League of Cities’ A Roadmap to Inclusive Entrepreneurship report, from childcare to churches.

Making Order of the Variety

While the medley of implementing entities, strategies, and capital delivery approaches can make SSBCI difficult to track, its variances also make it something of a $10 billion natural experiment. This, we hope, will lead to much needed innovation in the capital landscape serving small businesses.  It remains too early to determine the precise recipe for innovation using SSBCI, but as programs continue to roll out, we will look out for three things.

1) New types of capital products – with hundreds of programs across states, Tribal governments, and territories, there is ample room for innovation. Our small business capital products have not changed for decades, to the detriment of Black and Brown entrepreneurs, and we are overdue for product innovation, as we document in the Innovative Finance Playbook.

New products like revenue-based lending and redeemable equity, which move away from asset-based lending and tie repayments to performance without diluting founders’ equity in a firm, better fit more entrepreneurs and are taking hold. Supply chain finance – the use of contracts as collateral – can be a game changer for emerging firms in the construction and infrastructure spaces, especially as spending from the BIL, IRA, and CHIPS accelerates. We are beginning to see early signs of success here – we expect soon an announcement of Washington State’s revenue-based lending program, implemented by the National Development Council and Denkyem. And New York’s continued use of the Bonding Assistance and introduction of the Contractor Finance programs suggest an appetite for new products that are ripe to scale.

2) New forms of leveraged capital – SSBCI legislation mandates a one-to-one initial private match for every public dollar and sets a 10:1 target for private capital leverage over time. Countless organizations and financial institutions have pledged support for small businesses and for minority enterprises since 2020. SSBCI will test whether these institutions and new sources of capital can come off the sidelines and grow diverse small businesses.

Moreover, since SSBCI 1.0, we have seen the maturation of the impact investing movement. This has driven the growth of capital products and investment funds dedicated to underserved entrepreneurs, now with institutional recognition. There is ongoing work in and around the Biden Administration to fully integrate and leverage partnerships between states, private sector, philanthropy, and nonprofits focused on SSBCI and a larger, whole of government initiative with the Economic Opportunity Coalition to fully leverage current historic federal investment.

Here too we are seeing positive early signs. NetWork Kansas’s GROWKS Community Angel Support Program aims to leverage the growing significance of impact investing. Through philanthropic and community foundations across the state, the program will leverage foundation investment funds to anchor investments in areas like childcare, broadband, and other critical community development needs in local communities.

3) New forms of distributed capital delivery – finally, we will be watching to see how SSBCI programs can pilot and scale new forms of capital delivery. The goal here is twofold: investing in small business at scale and providing high quality support for firms on the ground. Our capital system makes it far easier for large pools of capital to invest in extractive projects (parasitic real estate, bargain retail) rather than productive ones. SSBCI will open up opportunities for thousands of productive and generative businesses. We hope it can also be a platform for localized, high-touch connections to support firms matched with wholesale and routinized forms of capital to grow them.

Managing and Mastering the Delivery Crisis

Achieving these goals in 2023 amid the onslaught of incoming federal dollars will require coordination on an unprecedented scale, as we have written on previously, with ARPA, on climate investment, and in the coming 2023 Year of the Local. State agencies are tasked with navigating not only the complexities of SSBCI itself (without dedicated planning dollars), but also braiding and aligning it with funds and opportunities born out of the more recent BIL, IRA, and CHIPS legislation. Moreover, SSBCI is stacked on top of existing federal small business programs: we found for the Innovative Finance Playbook more than 40 direct capital programs across six departments and agencies, from SBA to Interior, now seven with the EPA’s $27 billion Greenhouse Gas Reduction Fund established by the IRA. Successfully implementing a single program like SSBCI is itself a challenge; navigating across federal programs is exponentially more complicated.

With success, SSBCI will change how capital flows to our communities, reach those long excluded from our financial system, and hopefully begin to redress stubborn inequities that long predated the pandemic. We are hopeful of the early signs from SSBCI, including a recent announcement from Kansas, a member of our SSBCI Community of Practice. Their GROWKS Fund invested in WorkTorch, a career platform to help professionals in the service industry find the right fit and help employers fill openings and retain employees. Launched by two sisters, WorkTorch is the first Black women-run company in Kansas to raise $1 million in seed funding and is now poised to grow well beyond the state.

The intent of SSBCI 2.0 is ambitious and its potential is far-reaching. It is meant both to unlock capital for the reshaping of the US economy (the reshoring of production and accelerated implementation of climate solutions, among others) and address racial, ethnic, and spatial disparities. It is rare to find a federal program with such a broad remit and organic enabling of innovative delivery. It is a white-label product for states to align their unique needs, tailored to their trajectory, advantages, and strategies.

We are only at the beginning of a decade of SSBCI investment that will be a remarkable experiment in federalized program delivery.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Ian O’Grady and Bryan Fike are Research Officers at the Nowak Lab.