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State and Local Public Funding

In an effort to improve their local economies, most states, and many municipalities and counties, sponsor a variety of public funding sources for small business concerns. At the state level, nearly all states have some form of state economic development agency and/or state finance authority that make loans or loan guarantees to small businesses. State Commerce Departments often have direct or participating loan programs that may be even more attractive than SBA-guaranteed loan programs.

Although state programs and funding options vary, a popular form of program is a participating loan arrangement in which the state pools its public funds with money from a conventional lender to meet the needs of a small business borrower. For example, some states will loan up to 25 percent of the total cost of a small business project, with a maximum loan of $750,000. So, for example, if you needed a $100,000 loan, but a bank would lend only $75,000, the state "participates" in the loan by contributing public funding of $25,000 to the total loan package. The bank then processes the total loan of $100,000. The state is spared the administrative expenses of loan processing and the bank receives a priority lien on collateral.

Job creation goal. States sometimes receive federal money through block grants that can be used for a variety of local improvements, including small business financing programs. Urban development spending for larger cities, or smaller city community assistance programs, are oft-used purposes for the federal money. While the criteria for a small business to obtain a loan of grant money varies between states, the state will typically expect owner equity participation and evidence that a clear economic or social benefit to the local community will result from the funding. The amount of money made available at the local level will usually depend upon the perceived need for job creation in the area and the relative income level of that community.

Go local. In addition to state money, local county or municipal governments often loan small amounts of capital to local businesses. These local, "microloan" programs may be characterized by minimal (and sporadic) funding, so the timing of your request can be critical. Try to contact any local agencies as soon as possible, even if you don't need the money immediately, to determine the available funds at that time and when the program is expected to receive any additional money. Local programs can loan small amounts of money, e.g., under $10,000, for working capital, equipment or inventory purchasing, or property improvements.

Go private. Finally, don't forget to check local colleges, universities, or trade schools to see if they have any small business assistance programs. Some institutions, with the help of public funding, provide business "incubator" programs that can include consulting, marketing, services, facilities, and financing opportunities to local businesses as part of the institution's business education program.