California small business grants eclipse Covid-based loan program

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What would you choose: free money that you can keep or money that you have to pay back with interest?

It was the easy decision some small businesses may have made when California rolled out two financial relief programs around the same time in late 2020, according to a recent report by the Little Hoover Commission, an independent watchdog agency.

In response to businesses struggling with the pandemic, Governor Gavin Newsom unveiled a small business loan program called the California Rebuilding Fund in late November 2020.

About a week later, Newsom said the state would also distribute grants to small businesses affected by the pandemic.

“Loan funds can’t compete with free money,” said Scott Wu, executive director of IBank in California, a financing agency within the Governor’s Office for Economic and Business Development, which provided the l initial money for the fund.

In addition to state grants, repayable Paycheck Protection Program loans were available from the federal government. So IBank and the trade groups it worked with took a step back from marketing the loan program, Wu said.

Demand for loans has been “much weaker” than expected, according to a new report.

Initially, the architects of the loan fund expected it to grow to a size between $250 million and $500 million. So far it has raised just $114 million, said Beth Bafford, vice president of Calvert Impact Capital, which organized the fund.

Wu said there was a need for both types of relief. Grants ranged from $5,000 to $25,000, while loans are capped at $100,000.

The Rebuilding Fund distributed about $71 million in loans to about 1,200 businesses in California, the vast majority of which went to businesses with 10 or fewer employees, according to the report.

Businesses across the state have not benefited from the program in the same way. In 19 counties, no one received a loan, according to the report. In several counties, only one or two companies got one. All businesses that completed applications and met eligibility and credit requirements received the loan, Bafford said.

Two hundred and two loans totaling about $15 million were issued to businesses in San Francisco County, according to the report. Businesses in this county have received 17% of the total funds distributed so far, despite being home to 2% of Californians.

That’s because San Francisco built on top of the state program, investing $4 million of its own money, including $2 million to pay interest. This has allowed the city to offer interest-free loans to businesses, said Kate Sofis, director of the city’s Office of Economic Development and Workforce.

Without the zero-interest loans, far fewer businesses would have used the fund, Sofis said. And, she said, the city plans to invest an additional $1 million of its own money in the program.

Many other municipalities and counties have opted to run their own small business grant programs instead, Bafford said.

Fresno, for example, has set up its own grant program, said Tate Hill, executive director of Access Plus Capital, a small business lending fund that serves central California. Another factor, Hill said, is that some areas in California don’t have as many financial institutions dedicated to serving low-income communities that help run loan programs, but the Bay Area has plenty.

According to the report, businesses in the 13 counties that make up the Central Valley received a total of 53 loans totaling about $3 million, compared to 202 for San Francisco County.

“We have some of the poorest communities in the entire state,” said Rich Mostert, director of the Valley Community Small Business Development Center, which serves Fresno, Tulare, Madera and Kings counties.

San Francisco’s success hasn’t hurt the ability of businesses in other counties to get loans, Bafford said. The city’s program has attracted additional private investment into the fund, she said, and it’s not as disproportionate as it might seem based on population, given the high density of businesses in San Francisco.

Loans from the fund will be available until November 2022, Bafford said. She discusses with the State “what the future holds for us beyond”.

Grace Gedye is a reporter at CalMatters.

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