Filling the Financing Gap: Local Strategies to Support Entrepreneurship & Small Business Development

July 27, 2009

by Christiana McFarland 

This is the first article in a series focusing on entrepreneurship and small business development. This part highlights strategies that local governments can use to help finance these enterprises.

Entrepreneurs and small businesses are proven drivers of local economic growth. In fact, the U.S. Small Business Administration (SBA) predicts that small businesses, because of their innovative edge, will be critical to job growth, productivity and overall economic recovery. But in order for entrepreneurs and small businesses to thrive, they need a conducive local environment with several key ingredients. These include support networks, infrastructure, business management training, and importantly, financing opportunities.

With credit markets drying up and venture capital investments concentrated on larger deals on the coasts, the outlook for many small firms and entrepreneurs with capital needs does not look good. According to the U.S. Economic Development Administration (EDA), smaller, high growth firms seeking equity capital in the range of $500,000 to $2 million generally cannot be financed with traditional methods.

"These companies are often too new or too risky to be eligible for traditional bank loans," stated an article in the June issue of "EDA Update," The Seed-Stage Equity Gap: Local Solutions. "Yet, their capital needs are too small to interest many venture capitalists, who are often searching for deals in the $8 to 12 million ranges."

How, then, can local governments open new investment opportunities for entrepreneurs and small businesses in their communities? Local government strategies in this arena vary in the level of involvement and risk borne by the cities, and include activities such as developing local venture capital funds, connecting entrepreneurs with state and federal programs and supporting networks of angel investors.

Local Venture Capital Funds

To fill the financing gap, some local governments are creating their own venture capital funds, often in partnership with a private venture capital firm or with a non-profit organization, such as a community development finance institution (CDFI).

These programs tend to be directed toward specific, high-growth sectors of the local economy or emerging enterprises in disadvantaged and rural communities. Although local venture capital funds can be a risky undertaking, if managed properly, the return on investment for the city can be substantial.

For more information, see "A City in Action: The San Buenaventura Jobs and Investment Fund," by Neal Andrews, councilmember.

State and Federal Programs

With increased funding under the American Recovery and Reinvestment Act of 2009, the federal government has pledged to more aggressively support small businesses. The bulk of funding is available through the SBA and EDA, as well as the U.S. Department of Agriculture and the U.S. Department of Energy. 

On the state side, a primary mechanism for financing small business and entrepreneurial development is the Certified Capital Company (CAPCO) program. The program provides insurance companies with a tax credit incentive to invest in a Certified Capital Company, which in turn invests in state-based small businesses.

The majority of state and federal financial assistance does not flow through local governments, but instead goes directly to small businesses and entrepreneurs. Local governments can assist business development and expansion by establishing a one-stop business assistance center or partnering with small business development centers to connect local businesses with valuable information about state and federal programs and to provide technical assistance in attaining funding. One-stop centers also serve as central locations for market-related data, planning and development matters, and other business services. 

Angel Networks

Angel investors, wealthy individuals who finance new or growing ventures, tend to invest in the critical early stages of small business and entrepreneurial development. They have recently begun to organize in communities across the country, sometimes around specific industries or types of firms.

For example, the Women's Capital Connection (WCC) is a regional network of accredited angel investors dedicated to facilitating access to early-stage financing for high-potential women-led businesses and entrepreneurs in the Kansas-Missouri region. 

The Angel Capital Association suggests that local governments can support the efforts of angel networks by helping to generate "deal flow." In order to remain viable, angel groups need a sufficient number of potential deals in which they can invest. Local government can help generate deal flow by partnering with business support organizations to refer entrepreneurs to the network.

The appropriate strategy to support entrepreneurship and small business financing will depend on the goals of the community, capacity of your local government, and your city's overall business development strategy.

Details: For more information visit www.sba.govwww.eda.gov, andwww.angelcapitalassociation.org.

 

We Want To Hear From You

Is your city engaged in an innovative strategy to support entrepreneurship and small business financing? If so, tell us about it by e-mailing a brief program description and your contact information to mcfarland@nlc.org