Va. Small Business Financing Authority didn’t loan out $28M

State authority disbursed only 8%-10% of available funds for small businesses in 2018-19

Published September 14, 2020 by Sydney Lake

The Virginia Small Business Financing Authority (VSBFA) disbursed only 8% of its available funds in 2018 and just 10% in 2019 for loans, grants and bonds to help small businesses — holding on to $28 million, according to a study released Monday by the Joint Legislative Audit & Review Commission (JLARC).

A division of the Virginia Department of Small Business and Supplier Diversity, VSBFA offers financing programs including direct loans, support loan programs (encouraging banks to loan to small businesses), as well as grants and conduit bonds for small business growth and expansion. The authority was formed by the General Assembly to provide more financing opportunities for small businesses, since such businesses may be riskier investments and not be as profitable for banks as loaning to large companies.

JLARC released studies Monday examining the Virginia Department of Small Business and Supplier Diversity, the Tobacco Region Revitalization Commission and the state’s economic development initiatives. Among other findings, JLARC also determined that the VSBFA and the Tobacco Region Revitalization Commission had not achieved key goals.

JLARC also offered policy options for changing the definition of small businesses, which would ultimately be up to the General Assembly.

The changing of the definition of small business could affect procurement practices that the state uses to award contracts. One option would be excluding comparatively larger businesses from receiving small business certification by lowering the number of employees and gross receipts that a business may have to qualify. JLARC also offered the option of developing and adopting thresholds based on industry, similar to the U.S. Small Business Administration.

In its report on VSBFA, JLARC noted that the authority operates several financing programs for small businesses but the authority has also taken on the role of overseeing two COVID-19 relief programs that will award $80.3 million to businesses (mostly through federal CARES Act funding). Because the VSBFA has not been meeting criteria to effectively administer financing, JLARC recommends that it should set annual goals for loan program disbursements and direct staff to track and annually report the percentage of loan and grant program funds that are awarded or used.

“It’s very concerning to me that we have funding sitting there that is not being utilized. … If I knew how much we had to lend, our outreach activity would be much more assertive,” said an unnamed person associated with the VSBFA, according to the JLARC study, which also showed that the number of loan applications to VSBFA dropped in half between 2017 and 2018. The decline in applications could be due to a lack of cohesive outreach efforts by the VSBFA to businesses and banks about available funding. According to the JLARC study, many businesses are unaware of the VSBFA and its efforts.

“VSBFA has not established a cohesive plan that identifies specific business groups or banks to contact,” according to the JLARC study. “Without a formal plan, staff conduct outreach ad hoc and largely work with the same businesses and banks.”

And even for those businesses that do apply and receive funding, there is also a lack of formal loan risk policies and a risk assessment tool, which, according to the JLARC study, has led to confusion and “overly conservative loan decisions.” Because of this, one bank told JLARC that it had given up on using VSBFA as a loaning option.

“In the last couple of years I have referred three borrowers to your group, all of which were declined due to poor credit quality. … The last deal we referred, you declined because the credit quality was too good. … I am very confused about your goals in helping small business,” an unnamed bank told JLARC for use in the study.

JLARC recommended that VSBFA implement risk standards and a risk assessment tool to calculate the potential risk of loan applicants.

Under JLARC’s study of economic development initiatives, it found that Tobacco Region Revitalization Commission grant recipients had not been successful in retaining jobs because grant funding hadn’t been properly vetted — and therefore recommended that it should strengthen its due diligence procedures to increase the economic impact of the commission’s Tobacco Region Opportunity Fund.

According to the JLARC study, the opportunity fund has a lower benefit when compared to other Virginia grants due to poor performance on early projects. A high percentage of projects never materialize and grant awards are canceled before funds are disbursed or used, according to JLARC. 

The Tobacco Region Revitalization Commission’s megasite program has also failed to achieve its goals, JLARC found. Of nine businesses funded by the grants, only two have tenants and full build-out of the projects is expected to take decades, according to JLARC. 

“Only half of future employment at the sites is likely to be ‘net new’ employment for the state, with the other half representing relocated employees from elsewhere in the region or the state,” JLARC reported in the study. “Economic benefits for the megasite program are low and are expected to remain low compared with other incentives even if occupancy of the industrial sites increases.” JLARC recommended that industrial sites that receive funding should regularly report job creation and capital investments.

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