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The Covid-19 pandemic has dealt a devastating blow to America’s small businesses, especially those in rural America.
Long before the pandemic, rural small businesses were constrained by lack of access to capital and other challenges, most notably geographical isolation and inadequate broadband. These problems are magnified today as major disadvantages in the race to secure lifeline funding from the federal CARES packages and other small business assistance programs.
With appropriate modifications, there is an existing federal program that can serve as an additional reliable source of capital for small businesses in rural America. There are proposed regulations in the works that could increase investment and lending in rural America.
The federal government is the original investor in small business. In 1958, Congress established the Small Business Investment Company (SBIC) program as a mechanism for small business access to long-term capital for start-up, expansion, or recovery. Licensed by the Small Business Administration (SBA), these privately owned investment companies help small businesses with both equity and debt financing. Leveraging favorable rates and an SBA loan guarantee, SBICs have successfully invested billions of dollars in more than 100,000 businesses in a broad range of industries. According to A December 2019 Congressional Research Service report, one half of SBIC financing has gone to firms in either manufacturing (25.8%) or professional, scientific and technical services (14.6%).
Recognizing the challenges that rural small businesses face, a Rural Business Investment Company (RBIC) program was established within the U.S. Department of Agriculture (USDA) in the 2002 Farm Bill to promote developmental venture capital. Eighteen years later, the key difference is that the federal leverage is not available for the RBIC program as it is for the SBIC. So, while there are more than 300 SBICs to invest in small businesses through the Small Business Administration, only seven RBICs have been created through USDA to invest in rural small businesses. The RBIC program lack of federal leverage to get better interest rates and federal loan guarantees severely limits the creation of new RBICs to address the capital access problem of small businesses in rural America.
Banks have an incentive to invest in SBICs and RBICs through the Community Reinvestment Act of 1977 (CRA). While intended to work equally well in urban and rural areas, leveraging CRA in rural areas has proven to be more challenging. The reach of the CRA (originally focused primarily on urban neighborhoods) was refined in 2005 to include activities that revitalize or stabilize distressed or underserved communities in middle-income rural America. But the potential impact of CRA is nullified by the continuing loss of branch banks in rural areas. According to a 2019 Federal Reserve report, 800 rural counties (just over 40 percent) lost 1,533 branch banks from 2012 to 2017. Some of the rural counties experienced considerable declines in bank branches over those five years, and those counties were generally poorer, had residents with fewer years of education, and a greater proportion of African American residents relative to other rural counties. These public-private partnerships offer banks a competitive asset class and help them meet their regulatory requirements of the CRA. The challenges of branch bank loss and lack of investment in broadband were stressing rural America before this pandemic and may now bring it to its knees.
Lincoln called USDA, “the People’s Department,” but rural people are getting the short end of the stick in terms of small business investment that can be leveraged now. If we want rural America and its people to have equity, we must include a federal leverage for the RBICs just like the SBICs. After all, it funds are lent and repaid. The SBIC program has been so successful that the American Recovery and Reinvestment Act of 2009 (ARRA) included an increase in the amount of leverage available in the SBIC program by increasing the maximum amount and encouraging SBIC investment in smaller businesses, aiding in recovery of small businesses post-Great Recession.
What we need right now is more, not less, opportunity for public-private leverage to save small businesses through successful investment programs that already exist. Revamp CRA regulations sooner rather than later. The story of rural America has been one of economic decline coupled with an aging and shrinking population. Rather than allowing the pandemic to further hollow out Rural America, we have the tools to expand access to capital to the heart of the country so rural small businesses can create new domestic supply chains and innovators can provide affordable access to broadband. Proposed new CRA regulations are currently under review but in the interim, CRA investment in RBICs and increased investment and lending for broadband infrastructure and adoption as a qualified CRA activity are two activities that could be encouraged to help rural America.
Jeanne Milliken Bonds is professor of the practice in impact investing and sustainable finance at the University of North Carolina at Chapel Hill Kenan-Flagler Business School. She is the former mayor of Knightdale, North Carolina, and served as senior manager of regional development at the Federal Reserve Bank of Richmond.