The SBA and Small Business Recovery

written by MO.com Subject Matter Resource – Dr. Greg Bier

Many economists would argue that entrepreneurship is the backbone of a capitalist society. Even during a thriving economy successfully accomplishing a business startup can be a challenge. During a weak economy, as we have had for a few years, it can be especially difficult. However, the statistics point to an improving landscape for small business owners. Last year, with support from the U.S. Small Business Administration (SBA) 60,000 loan approvals were made for a record $30,000,000,000. That is a lot of zeros! What caused the increase?

The SBA’s role in our society is to assist small business. Until recently, credit has been exceptionally hard to come by…if not impossible for entrepreneurs. Recognizing the importance of small business to our economic recovery in 2009 congress agreed on something. (That should be the real headline!) Legislation was passed called the American Recovery and Reinvestment Act of 2009. While we often don’t think that things that happen in Washington, D.C. have much impact on Main Street and our daily lives, and granted, it took a while, but this act did. It provided increased loan limits on SBA-backed loans.

Unless you are really tied into your local SBA you might have missed some key facets of the legislation that are having a real impact on the recovery of small business. Probably most important is the fact that small business owners without buildings or equipment to use as collateral no longer are required to use their personal assets as collateral. Additionally, accounts receivable, contracts, and pending purchase orders and inventory can now be used to help secure a line of credit. While cash is certainly king…having some SBA help with a line of credit is a royal feat.

More recently the SBA announced a revised process to nurture and invest in high-growth start-ups. The new program, called the Early Stage Innovation Fund would allow the SBA to license venture funds to borrow money from the SBA to supplement the capital that the venture fund raises through private equity. It may sound complicated, but it fills a void in the SBA’s ability to assist small businesses…especially those with riskier, high-growth opportunities. Companies seeking assistance would not petition the SBA. Instead, they pursue venture funds that would, as usual, evaluate the merits of the business opportunity. While investors involved with venture funds typically look for more established small businesses the Early Stage Innovation Fund will attempt to encourage them to consider expanding their portfolio by looking at companies at an earlier stage…perhaps even still in the conceptual stage.

The SBA’s Early Stage Innovation Fund anticipates accepting applications for these licenses from venture funds in April 2012. Leverage is limited to an amount equal to the capital that the venture fund raised in private capital, up to $50 million. The total SBA Early Stage Innovation Fund is a $1 billion program.

Even as the US economy struggles small businesses must identify the next opportunity. Many small businesses are so focused on making their business model work locally or regionally that they overlook export opportunities. While the SBA works to flow more capital to small businesses, small businesses should look to expand, perhaps using that new found capital to expand overseas. As more and more trade barriers fall, small businesses remain a very small share of exporters. The Chinese market, for example, is developing as a strong consumer market with money to spend. With small business capital starting to flow the in the US, partly in thanks to the SBA, consider what opportunities are out there to expand your small business…even overseas.