Virginia Small Business Commission

July 31, 1997, Richmond

The Virginia Small Business Commission convened its first meeting in 1997 to receive reports on (i) Virginia's financial and assistance programs for small business, (ii) capital access and financing for rural small business enterprises, and (iii) small business and health care legislation. The 14-member commission was established in 1995 and serves Virginia's small business community by evaluating the impact of existing statutes and proposed legislation on small businesses, as well as assessing the Commonwealth's small business assistance programs and examining ways to enhance their effectiveness.

Small Business and Economic Development

State-promoted economic development programs and their potential for generating small business opportunities is an issue of continuing interest to the commission. The Secretary of Commerce and Trade told the commission that small business has not been left out of the Allen Administration's economic development programs over the past three years—programs that have brought in companies like White Oak Semiconductor, Gateway 2000, and Frito-Lay, along with 211,000 net new jobs and $11.5 billion in investment. The secretary said that half of the new companies coming to Virginia in conjunction with economic development promotions are small businesses with fewer than 75 employees.

Small Business Development Centers

The Small Business Development Center (SBDC) program provides management assistance and technical advice to small- to medium-sized start-ups and existing businesses. The centers provide training in a variety of subjects, including how to start a business, managing cash flow, raising capital, and developing a business plan. This statewide program, funded through federal, state and private financing, operates out of 26 regional offices throughout the Commonwealth. Virtually all SBDC clients employ fewer than 100 employees.

The SBDC's director advised the commission that professionalism requirements have been recently instituted, including requiring all regional center directors to have master's degrees. The director also reported that in 1997 the program counseled over 10,000 businesses and helped create or save about 3,000 jobs. Commission members expressed an interest in following the SBDC's development and conducting a small business needs assessment survey.

Small Business Financing Authority

Since its creation in 1994, the Small Business Financing Authority (SBFA) has offered a variety of loan and guaranty programs through public-private partnerships to provide financing to Virginia businesses for growth and expansion. The authority offers industrial development bonds, a loan guaranty program, export financing assistance and similar programs including defense conversion and child day care financing programs. The authority reported to the commission that in fiscal year 1997, it helped arrange more than $64 million in business loans to 93 businesses in the Commonwealth, thereby creating or saving 2,674 jobs. The 1997 General Assembly placed two new programs under the authority's umbrella: the Small Business Growth Fund and the Export Loan Guaranty Fund.

The Small Business Growth Fund (also known as the Virginia Capital Access Fund) provides loan loss reserve funds for participating banks through matching VSBFA funds. The loan loss reserve fund, with contributions by borrower and lender, together with matching amounts from the VSBFA, is designed to promote private market lending to small business loan customers who may be otherwise ineligible for conventional business loan financing. The 1997 General Assembly furnished a $350,000 appropriation, which is expected to help leverage approximately $10 million in new loans.

The Export Loan Guaranty Fund is designed to increase access to capital for small businesses targeting international trade opportunities. The fund authorizes VSBFA to guarantee up to 90 percent of the principal amount of commercial loans (up to a maximum of $1 million) made by a lender for the purpose of facilitating the sale of goods, products or services outside the United States by persons, firms or corporations that utilize a Virginia air-, land- or seaport to ship such goods, products or services. The 1997 General Assembly provided $750,000 in funding for the fund in its inaugural year.

Child Day Care Financing Program

The Child Day Care Financing Program—administered by the SBFA—provides loans of up to $25,000 for improvements in child day care programs and facilities. The program provides direct loans to finance quality enhancements for child care programs or to meet or maintain child care standards, including health, safety and fire codes. The program exists because bank financing for child care centers and providers is reportedly difficult to obtain since (i) prospective borrowers usually have little collateral and (ii) day care businesses operate on thin profit margins. According to a program representative, the program has provided over $ 2.1 million in financing, creating 2,500 new child care spaces and over 135 new employment positions, since it was launched in 1994.

The program attracted the commission's attention in 1996 when funding for the program was not requested in Virginia's 1996-1998 Child Care and Development federal block grant application (as submitted by the Council on Child Day Care and Early Development Programs). Since the program historically relied entirely on these block grant funds for all of its operating funds, by the summer of 1996 it had no means of underwriting new loans. The Department of Social Services had responsibility for administering this block grant program in 1996 after the council was eliminated.

The Commissioner of Social Services ultimately advised the commission that it would provide departmental funding for the $170,000 in outstanding loan requests submitted in 1996. Additionally, a 1997 General Assembly budget amendment placed a $750,000 Child Day Care Financing Program obligation in the departmental budget, without special appropriation. The SBFA's representative told the commission that the department and the SBFA are making arrangements for transferring the funding into the program. However, the commission was advised that no funding for the Child Day Care Financing Program was requested as part of the department's current federal block grant application. A departmental representative told the commission that the Commonwealth's current inventory of child care providers and spaces is sufficient to meet existing need and that re-targeting priorities in the block grant is appropriate—particularly in light of welfare reform legislation requiring work by public assistance recipients, thereby creating a demand for child care subsidies. Commission members expressed their hope that additional departmental funding would be provided to the program in 1998.

Capital Access Needs of Rural Small Businesses

Whether access to credit in rural areas has become a problem and a serious barrier to economic development is a subject under study by the Rural Economic Analysis Program (REAP) sponsored by Virginia Tech. The commission examined this issue in 1996 with the assistance of REAP's coordinator. The commission made no recommendations in 1996 but did receive information about the pilot program after which the Small Business Growth Fund (discussed above) was modeled.

The REAP coordinator returned to furnish the commission an update on the REAP study, designed to measure the existence and extent of a possible rural credit gap. The study, he reminded commission members, was concentrated on Brunswick, Halifax, Grayson, Mecklenburg and Patrick Counties. Approximately 2,000 surveys were sent to a random sample of farm and nonfarm businesses located within the survey area. The survey posed questions about credit availability, access and denial. The REAP study concluded that rural financial market conditions in Virginia do not reveal widespread inadequacies and that there has been no massive market failure. Cash flow and collateral requirements are the most common reasons for loan denials in this small business loan market.

The REAP report concluded, however, that there were certain inadequacies in this market, chiefly loan customer ignorance of key information, such as (i) available governmental loan programs or business assistance and (ii) interest rates or loan conditions in the local market. The report also noted that the average size of loans sought by the survey respondents was very small (ranging from $5,000 to $20,000) and that lenders are frequently uninterested in loans this small because loan preparation, investigation and processing costs may make them uneconomical. Another important conclusion was REAP's assessment of governmental involvement in this market. It noted, for example, that only a small percentage of rural businesses reported using state programs such as the Small Business Development Centers. REAP's coordinator agreed with commission members that these programs need greater visibility and that their successful marketing could lead to increased and helpful utilization in these rural markets. He also noted that private lenders should be encouraged to facilitate borrower use of these programs as well.

Small-Business-Related Health Care Issues

The commission follows health care reform activities as they affect Virginia's small business community. The Joint Commission on Health Care staff briefed the commission on (i) the federal Health Insurance Portability and Accountability Act (HIPAA), (ii) the status of small group insurance reforms, and (iii) options currently being considered by the joint commission. A significant development was the 1997 General Assembly's enactment of legislation implementing HIPAA in Virginia. HIPAA (popularly known as the Kennedy-Kassebaum bill) focused on such issues as guaranteed health insurance renewability, preexisting condition waiting periods, and providing credits for waiting periods served in previous coverage. Many of HIPAA's provisions had been previously enacted in Virginia as part of insurance reform legislation adopted in the past several years.

Commission members learned, however, that Virginia's "bare bones" essential and standard health care plans have had minimal impact. Only 14 of 70 carriers have sold them, and the plans cover fewer than 100 employers with approximately 500 employees in all. It seems likely that many employers are unaware of the plans; it is apparent that insurers are not expending marketing resources on them. However, the joint commission reported that it is reviewing options for fine tuning these plans, including expediting their review and updating and strengthening marketing requirements to make employers more aware of them.

Other Matters

The commission received a brief presentation from the president of the Little Creek East Business Association (Norfolk), who described a variety of projects (including road and signage improvements) undertaken by the association in its efforts to upgrade and maintain a business district along a four-mile roadway linking the City of Norfolk to a U.S. Navy amphibious base. He noted that many of the programs coordinated by the Department of Business Assistance and discussed in the course of the commission's meeting were unfamiliar to him and probably to other members of his business association and suggested better marketing and publicity.

The commission will convene its next meeting in Richmond on October 1.

The Honorable Stanley C. Walker, Chairman
Legislative Services contact: Arlen K. Bolstad