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Part of the series “Viewpoints on Resilient and Equitable Responses to the Pandemic” from the Center for Urban and Regional Studies at The University of North Carolina at Chapel Hill.

The COVID-19 pandemic is causing people around the world to question how this virus will affect the many public and private systems that we all use. We hope this collection of viewpoints will elevate the visibility of creative state and local solutions to the underlying equity and resilience challenges that COVID-19 is highlighting and exacerbating. To do this we have asked experts at UNC to discuss effective and equitable responses to the pandemic on subjects ranging from low-wage hospitality work, retooling manufacturing processes, supply chain complications, housing, transportation, the environment, and food security, among others.

Tyler Mulligan is a professor of public law and government at the School of Government at The University of North Carolina at Chapel Hill. He directs the Development Finance Initiative (DFI) at the School of Government, and he teaches public officials in North Carolina on community development, downtown revitalization and affordable housing. DFI has directly advised state and local government officials on the creation of small business loan programs in response to the COVID-19 pandemic. In this podcast, he discusses the equity implications for such programs on the basis of his legal research and DFI’s experience helping public officials establish small business loan programs.

Transcript – Viewpoints on Resilient & Equitable Responses to the Pandemic. Tyler Mulligan: Small Businesses

The COVID-19 public health crisis has given rise to an unprecedented economic crisis. Economic activity across the nation has slowed considerably, and many small businesses—which were operating successfully before the pandemic—are now struggling to survive. Some have already closed their doors permanently. Business closures on a vast scale would likely inhibit a recovery for years after the current crisis subsides. The economy will tend to rebound more quickly after the crisis if small firms are able to keep their staff in place and are able to resume normal operations as soon as restrictions are lifted.

The key from an equity perspective is setting up business support programs to reach firms that don’t have access to traditional sources of capital—firms that could be considered unbanked or underbanked. During the pandemic, governments at all levels—federal, state and local—have attempted through various means to reach underbanked firms. The government’s success in reaching those firms has depended on whether the government is federal, state or local, and whether the government’s program relied on private intermediaries, such as banks or other financial institutions, to administer the program.

Before looking at different approaches, it is important to keep in mind that governments, and their nonprofit partners, do not possess unlimited authority to aid businesses. They are restricted by law, which varies at different levels of government, and they are restricted by the general notion that businesses are not appropriate objects of charity. Put another way, governments and charitable nonprofits are empowered to aid needy individuals, but their legal authority becomes murkier when the target of aid is a business.

A business can receive aid as a conduit for helping needy individuals, so long as the focus remains on the individuals. As an example, a struggling firm could be stabilized by a government program to enable the firm to hire back its laid-off employees. The permissible focus of the program would be the unemployed persons who would be rehired. With that legal background, we’re ready to examine some of the government approaches taken during the current crisis.

We’ll start with the federal government because it has played the largest role in providing support to businesses during the pandemic. The U.S. Congress responded to the pandemic with a generous package of loans and grants for small businesses. Federal law and the U.S. Constitution allow such programs so long as Congress properly enacts enabling legislation and uses federal agencies to administer the programs. One of the most notable pandemic-related programs is the Paycheck Protection Program, or PPP, which offered both loans and grants to firms harmed by the pandemic. An important element of the Paycheck Protection Program was that government aid was delivered to firms through commercial banks.

The advantage of relying on commercial banks is that the federal program could utilize existing private banking infrastructure and banking relationships, which enabled rapid distribution of funds on a vast scale. Using commercial banks to distribute federal loans may have provided gains in efficiency, but it also had drawbacks from an equity perspective. Commercial banks were overwhelmed by the number of applications they received for PPP loans, and to deal with this demand, many of the banks offered the program only to their existing customers. This approach favored larger firms with established banking relationships and better financial positions, and it placed many small firms at a disadvantage when attempting to access the loans. This was especially true for minority and women-owned firms that did not have the same banking relationships as other businesses.

The challenges faced by small firms in accessing PPP loans was well reported in the media. The federal government therefore attempted to compensate for this weakness when it offered a second round of PPP loans. In the second round, the U.S. Treasury set aside a portion of available funds for a special class of financial institutions called Community Development Financial Institutions, or CDFIs, which are nonprofit, charitable organizations that specialize in providing financial services to low-income and underserved communities and businesses. In other words, CDFIs are good at making the loans that commercial banks might overlook. However, the amount of PPP funds set aside for CDFIs was relatively small. Out of the more than $650 billion dollars that Congress appropriated for the program, only $10 billion was set aside for CDFIs. As Congress considers a third round of PPP, legislators are calling for the CDFI set-aside to be even greater than in prior rounds.

State governments have also provided relief to small businesses during the pandemic. States are generally prevented from making outright grants to businesses based on state constitutional provisions that prohibit making gifts to private enterprise. Those provisions that have been in place in most states since the late 1800s. It is therefore more legally sound for a state to offer loans. When the State of North Carolina sought to create its largest pandemic loan program, it didn’t turn to commercial banks like the federal government did. Rather, the state turned to a network of about a dozen CDFIs that were already operating in the state.

This approach—using nonprofit community development institutions rather than commercial banks—has resulted in dramatic success from an equity perspective. The program reported in September that nearly 80% of their loans went to firms with fewer than 10 employees. Almost two-thirds of the loans went to historically underutilized businesses that are minority or female owned. From an equity perspective, that state loan program is an excellent complement to the existing federal loan programs.

Now, while state programs certainly allow for a more local focus than a federal program—state programs, even the one just mentioned, still cannot reach everyone. The CDFIs participating in that statewide program do not have a presence in all North Carolina communities. Thus, it is also necessary to take an even more localized approach in order to reach unbanked or underbanked firms. And this is why, even with federal and state programs already in existence, local governments still have an important role to play in creating equitable small business financing programs. Local governments often know their small business community as well as or better than anyone else, and they have relationships with commerce organizations that also know those small firms well.

In designing a local government loan program, the approach to be taken depends on whether the local government has a trusted nonprofit partner that can manage the program, or whether the local government prefers to manage the loan program itself. The different approaches essentially fall into those two categories: programs managed through a nonprofit partner, and programs that are managed entirely by the local government. We’ll take a look at each category.

Some local governments have a strong relationship with a trusted nonprofit partner that knows local small firms and has a solid track record of managing small business programs. However, a local government can’t partner with just any nonprofit—the nonprofit should have experience with managing a loan program. The nonprofit partner must have systems in place to perform financial underwriting to verify the need and to determine the appropriate loan amount for the applicant business, and the nonprofit must be able to complete loan documentation and track the loans over time.

An example of this model in North Carolina is the City of Fayetteville and its long-time nonprofit partner, the Center for Economic Empowerment & Development or CEED. Early in the pandemic, the City appropriated $250,000 for small business loans and paid CEED $10,000 to manage the program. CEED already offered small business counseling—so it had existing relationships in the small business community. CEED also had experience issuing federal Small Business Administration loans, so CEED had the systems in place to manage the City’s loan program. Finally, CEED is a charitable 501(c)(3) nonprofit with a mission to provide access to capital for small businesses that wouldn’t otherwise have access to capital through the traditional banking system, so CEED knew how to reach underbanked firms. CEED was an ideal partner for the City.

But some local governments don’t have local nonprofits with the necessary skills and systems in place—and those local governments may opt to go it alone. An example in North Carolina is the Town of Belmont, which was the first local government in North Carolina to establish an emergency loan program specifically for the pandemic. The Town created some simple loan documents and issued the loans itself. Many local governments have systems in place for monitoring loans—for example, local governments that operate utility systems, such as water and wastewater, can sometimes rely on those systems for financial management and billing, and that enables them to run a loan program on their own.

For more detail on the topics discussed in this podcast, take a look at some of the blog posts on the School of Government blog for community and economic development, found at There are several posts that describe how local governments can legally support small businesses, either on their own or in partnership with charitable nonprofits.

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