How a wave of government programs for small businesses are strengthening the U.S. entrepreneurial ecosystem
Fresh federal funding, particularly the $10 billion State Small Business Credit Initiative (SSBCI), is flowing into the small business sector. This presents a once-in-a-generation opportunity to bolster the overall ecosystem supporting entrepreneurs. By complementing this funding with the right technology and infrastructure, there is a historic opportunity to greatly improve and secure the success of more small businesses, a key cornerstone of the U.S. economy.
An opportunity to strengthen the backbone of the U.S. economy
Small businesses are the engines that drive the U.S. economy — America’s 33.2 million small businesses create just under two-thirds of all new jobs, employ almost half of America’s private sector workforce, and represent 43.5% of GDP.
Beneath these impressive statistics, however, lies the reality that operating a small business is a daily challenge, especially amidst high inflation and economic uncertainty. The diminishing number of smaller traditional banks further compounds the struggle, leaving local businesses with limited options for essential financing to sustain or expand. What’s more, nearly 50% of small businesses will fail within five years.
Against this backdrop, a succession of bipartisan-supported federal programs are injecting much-needed investment into the small business ecosystem — marking an unprecedented moment in history. These federal initiatives not only offer critical growth capital but, by their expansive scale, are also fostering new innovations and enduring partnerships that will extend beyond the lifespan of any individual federal program. Moreover, these new laws incorporate lessons from past initiatives and the pandemic, aiming to reach entrepreneurs in lower-income communities historically excluded from such programs.
This post is the first in a series exploring areas where Mastercard’s small business-focused initiative, Strive USA, identifies opportunities for transformative impact with the influx of federal funding. This series will also spotlight the change-making organizations that are meeting this moment to strengthen small business ecosystems across the country for those who need it most.
Catalyzing new support pathways though SSBCI
The State Small Business Credit Initiative (SSBCI) is one notable federal program that is helping thousands of small businesses get the support they need. Enacted in 2021, this program allocates $10 billion in capital to entrepreneurs nationwide with the goal of helping small businesses grow and build resilience. The funds are distributed from the Department of Treasury to participating U.S. states, tribal governments, the District of Columbia, and territories. The initiative aims to amplify its impact by leveraging additional private sector capital, requiring an initial 1:1 private match and aspiring to achieve a long-term 10:1 private-public leverage throughout its duration.
The SSBCI law that passed in 2021 is the second iteration of the program and incorporates many lessons learned from working with small businesses over the past decade. For example, $2.5 billion is allocated specifically for small businesses owned by socially and economically disadvantaged individuals, and $500 million for businesses with fewer than 10 employees. Both groups have historically faced more challenges accessing federal funding.
SSBCI also now provides more than just growth capital, with $200 million earmarked specifically for technical assistance. This component of the program reflects the key learning that providing access to capital is not enough: Capital often needs to be combined with know-how and infrastructure strengthening so entrepreneurs can learn about, and get guidance on how best to use, new investment.
Effective public policy, however, requires more than legislation. Support organizations collaborating with small businesses must also operate impactful programs in order to deploy funds — or help deploy funds — to the small businesses that need it most. This often necessitates acquiring or building supporting tools, implementing robust reporting mechanisms, and fortifying infrastructure. This is particularly true for Community Development Financial Institutions (CDFIs), a network of more than 1,300 mission-driven organizations that focus their lending support on lower-income rural, urban, Native, veteran, and other communities who are often underserved by mainstream finance.
Building on lessons from the pandemic
In recent years, CDFIs have experienced significant growth, especially after showcasing their crucial role as “financial first responders” during the pandemic. This is true of Strive USA grantee, Community Reinvestment Fund, USA (CRF), a national nonprofit CDFI whose mission is to improve lives and strengthen communities through innovative financial solutions.
Prior to the pandemic, CRF had identified the need to create new digital tools that would make it easier for small business owners to find and connect with CDFIs and mission-driven lenders. They recognized it would take significant investment in infrastructure, and through grants secured from partners like Mastercard Strive USA and Wells Fargo, CRF was able to develop its “CRF Connect” tool — which later became the enabling, and otherwise almost impossible-to-find elsewhere, lifeline linking thousands of small businesses to state and federally funded pandemic loans through community financing institutions in the early days of the pandemic.
“The pandemic showed us the power of connecting organizations to funders through a digital framework, and also the importance of simplifying loan applications, especially for federal funds. We doubled down on this work before the pandemic thanks to Strive USA, and now we’re able to apply the learnings to SSBCI — and, soon, hopefully, to other federal programs,” says Patrick Davis, SVP of Platform & Tech Services at CRF, an anchor grantee of Strive USA.
CRF has goals to expand its digital tools and infrastructure to bring about efficiency in loan applications, data monitoring, and reporting for the country’s network of CDFIs, many of them looking for system efficiencies and ways to reach more businesses while enhancing the overall customer experience. This will allow these community financing institutions to focus on the work they do best: That of serving small businesses in their community and nurturing those relationships.
CDFIs and their partners: A critical nexus between public-private partnership programs and local small businesses
CRF is both a national nonprofit small business lender and a technology provider — and they exemplify how small business support organizations can work with federal programs to drive lasting change for local small businesses.
New York City-based Renaissance Economic Development Corporation is a CDFI within CRF’s network of partners, whose mission is to transform low-to-moderate income and immigrant communities in the NYC Metro Area by providing low-interest small business loans, training, and counseling services. Since its formation 25 years ago, Renaissance has deployed $66 million in loan capital to 2,500 small businesses in the NYC Metro Area and provided business support service to more than 10,000 small businesses.
Renaissance started working with CRF as part of the NYC Small Business Opportunity Fund, an innovative public-private partnership between the City of New York, Goldman Sachs, the Mastercard Center for Inclusive Growth, and eight local CDFIs — including Renaissance. The NYC Small Business Opportunity Fund was designed with flexible terms, including lowering barriers to application by not requiring a credit score or application fee and enabling businesses to pay off high-interest debt accumulated during the pandemic.
The technology and fund administration services provided by CRF were instrumental in enabling Renaissance to successfully lend in the program; Renaissance deployed $10.4 million to 130 small businesses, 85% of which self-identified as diverse. This accounted for more than 15% of all funds deployed by Renaissance since inception. Jessie Lee, Managing Director of Renaissance, credits CRF as being an invaluable partner as they sought to successfully deploy capital to small businesses.
Building on Renaissance’s successful experience in the NYC Small Business Opportunity Fund, when CRF expanded into New Jersey to assist the state in establishing its SSBCI loan fund, Renaissance followed suit. Supported by SSBCI, the New Jersey Capital Access Fund provides loans up to $250,000 from non-profit lenders like Renaissance, with no specific collateral required.
The decision to expand to a neighboring state was a natural one for Renaissance, driven by their mission to help small business owners succeed. Additionally, their familiarity with CRF’s technology through participation facilitated a seamless onboarding process. The federal funding provided by SSBCI also minimized the amount of additional capital they needed to raise directly.
In addition to working with CDFIs such as Renaissance in New Jersey, CRF’s technology has supported CDFIs in New York, Indiana, Nevada, Washington, California, and other states.
Increase CDFI loan volume through secondary markets
More — and more accessible — capital, technology that makes it easy for small businesses to get loans, and targeted marketing all helped Renaissance broaden its reach into New Jersey. But the creation of a secondary market via a funding “pool” structure, driven in part by SSBCI, has also significantly helped grow the ability of Renaissance and other CDFIs to deploy more capital to small businesses.
Secondary markets for loans are a structure commonly used in mainstream financings, but were not readily available to CDFIs and community lenders until the pandemic (and even then on a small scale). Combining federal funds with private funds in an entity that then purchases a specified percentage of loans (usually 80%) can dramatically increase the capital available for small businesses by taking those loans off of their balance sheets. This form of leverage — essentially recycling the public dollars into significantly more dollars — is now a standard requirement for federal small business funding programs.
Renaissance and other small business lenders participating in these federal programs face challenges related to the complexities of processing loan participation sales, loan servicing, and meeting extensive reporting requirements. CRF’s Exchange platform automates the sale, processing, and reporting of loans within the pool structure. This system enables Renaissance to efficiently re-sell a significant portion of the loans originated through the NJ Capital Access Fund into the fund, ultimately freeing up more capital for additional loans. CRF Exchange, along with CRF’s Fund Administration service, have facilitated the purchase of more than $100 million in loans to over 1,000 small businesses through a variety of programs.
Efforts are underway to create a more scalable secondary market for CDFI-originated small business loans, which could generate value and impact for CDFI originators and banks, directly benefiting the businesses and entrepreneurs they serve.
The opportunity at hand
The small business ecosystem today is fragmented, making coordination and collaboration more difficult for small businesses to navigate. Yet that fragmentation is also providing an opportunity that federal programs can help realize — the urgent need to build and scale new platforms, tools, and innovations that result in a stronger ecosystem, one that prevails in times of both great upheaval and relative stability.
“Federal programs such as SSBCI provide a historic opportunity to help strengthen small business ecosystems — but only if we can use this moment to build new tools and infrastructure that can help all small businesses,” says Sandy Fernandez, Vice President of North America, Mastercard Center for Inclusive Growth. “We need to make sure we harness this moment to drive changes that will last far beyond the lifetime of programs such as SSBCI.”
