Gov. Dannel P. Malloy announced last week a $100 million proposal to extend his Small Business Express program two more years, as part of a campaign promise to spur job growth, particularly among minority and women-owned businesses.
While the state does need to do more to help small companies, particularly those located in poorer urban neighborhoods, it’s time for policymakers to slam the brakes on the small business lending program, which has already distributed more than $150 million since it was created in 2011.
The program, which feeds low-interest loans and grants to firms with 100 or fewer employees that agree to add jobs or invest in equipment or infrastructure, was a key part of Malloy’s economic development efforts following the Great Recession. It was originally conceived as a two-year program but was extended to four years. Now Malloy wants to keep the program going for an additional two years, which would cost the state $100 million at a time when taxpayers face a $1.4 billion deficit in fiscal 2016.
Yes, Connecticut’s economic recovery has been painfully slow, but it’s now been four years since the Great Recession passed us by, making it hard to argue that state government still needs to be the lender of last resort.
The express program was conceived at a time when there was a significant credit gap that blocked many small businesses from accessing enough private capital to rebound from the recession. But the lending environment has since improved.
In fact, only 18 percent of the 219 businesses recently surveyed by the Connecticut Business & Industry Association said obtaining credit was a problem, down significantly from previous years, although still above pre-recession levels.
Connecticut banks have plenty of capital and are eager to invest in creditworthy borrowers.
Ending the express program doesn’t mean the state should totally get out of the economic incentives business. While we’re skeptical of Malloy’s economic development strategy that relies heavily on providing loans and grants to businesses, we understand that Connecticut companies operate in national and global economies and are constantly being wooed by other states.
We’d prefer federal legislation that bans states from offering cash bribes to companies that agree to relocate offices and workers, but that won’t happen.
State government does have a role in offering certain incentives, including tax credits, to keep and lure businesses, but the amount of state aid distributed in recent years has been excessive. We need to rein in certain incentive programs and focus on reducing the cost of doing business in Connecticut, which is the only real way to create long-term, sustainable job growth.
One option the state could consider is converting Small Business Express into a loan guarantee program, akin to the U.S. Small Business Administration. It would be less costly to taxpayers and will get the private sector involved. The idea was kicked around in 2011, after some Connecticut bankers voiced concerns about the state being in the small business lending industry.
Banks can handle loan underwriting and due diligence, with the state issuing loan guarantees. Banks have said in the past they could leverage the state’s funding to perhaps twice the dollar volume in business express loans. Higher guarantees could be promised to loans issued to minority and women-owned firms.
Such a private-public partnership makes more sense at a time when Connecticut needs to be more frugal with its economic incentive offerings.
