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Pumping up small businesses with state funds

Copyright © 2019 Albuquerque Journal

Thousands of small New Mexico businesses have received about $82 million in loans since 2001 from some of the state’s most-prominent microlending organizations, but few recipients know the money they got came from state funds.

The New Mexico Small Business Investment Corp., a nonprofit founded in 2001 under the Small Business Investment Act, has managed about $47 million from the state’s Severance Tax Permanent Fund to create jobs through small local businesses. It invests the money in microlending organizations like Accion and the New Mexico Community Development Loan Fund, which in turn pump those dollars into new startups and existing businesses that generally can’t get credit from traditional lending institutions.

Recycling repaid loans

Russell Cummings

The SBIC has provided about $23 million since 2004 to microlenders, allowing them to approve some 4,500 loans to small businesses in 31 of New Mexico’s 33 counties. By recycling repaid loans back into the program, the microlenders have channeled nearly $82 million in credit over the years, creating and supporting about 12,300 jobs across the state, according to the SBIC’s annual report for fiscal year 2018.

That’s more than three times the bang for each buck loaned to microlenders, said SBIC Executive Director and Investment Advisor Russell Cummings.

“The money keeps revolving,” Cummings said. “When small businesses receive a loan, they repay it with interest and it flows back into the program to lend out again. All that turning and churning has had a huge impact on small-business growth and job creation.”

Now, the SBIC is poised to deploy another $52 million in additional severance tax capital, thanks to a new law approved this year that doubles the amount of permanent fund money earmarked for the SBIC. Gov. Michelle Lujan Grisham spearheaded the bill (SB 10), which was sponsored by Sen. Carlos Cisneros, D-Questa. It passed with broad, bipartisan support, taking effect this past Monday.

Governor pushed change

John Bingaman

The increase in SBIC funding is part of the governor’s economic development agenda, said Chief of Staff John Bingaman.

It’s one of the few bills aimed at taking more money from the state’s permanent funds for local programs that have earned legislative approval. Repeated efforts to increase the state appropriation from the Land Grant Permanent Fund for childhood education have failed, including a governor-backed push in the last legislative session.

But SB 10 garnered bipartisan backing because it directly injects money into grassroots job growth while potentially earning returns for the Severance Tax Permanent Fund.

“Small businesses are the lifeblood of New Mexico’s economy, and they’re responsible for a lot of job growth around the state,” Bingaman said. “The permanent funds are being invested in stocks and bonds, so why not take some of it to also invest in New Mexico. Policy makers want good stewardship of those funds, and this allows us to do both — invest in New Mexico while safeguarding the permanent funds, because we get a positive return on that money while deploying it in small businesses across the state.”

Cost-effective

A 2017 impact study by the University of New Mexico’s Bureau of Business and Economic Research found that the SBIC lending program helped create employment at a five-year average cost of $4,717 per new job. That’s less than the $5,941 per new job spent under the state’s Job Training Incentive Program, and only slightly more than the $4,255 per job through Local Economic Development Act spending.

“The cost per job is very compelling,” Bingaman said. “It compares favorably to any other state program.”

As for returns, the SBIC did struggle in its first decade of operations. That’s because, apart from pumping money into microlending organizations, it also invested in local venture capital funds until about 2008, when the recession wiped out many fledgling, venture-backed startups.

The SBIC lost about $13 million from those investments at the height of the recession as cash-strapped startups crashed and burned.

A new direction

In 2011, however, former Gov. Susana Martinez appointed all new members to the SBIC board, which then pulled the SBIC out of all new venture investments to focus exclusively on lending programs.

Joseph Badal

“The previous board had a strong focus on venture capital, but this board essentially reversed that,” said current SBIC President and Board Chair Joseph Badal. “We changed the policy, because venture capital is extremely risky and it’s taxpayer funds that we’re playing with.”

The SBIC still has about $9.7 million in outstanding, pre-2011 investments in venture funds. Recent “exits,” or sales, of venture-backed companies by some venture funds have earned returns for the SBIC, reducing its recession-era losses to about $9 million now. And the losses could continue dropping over time as the SBIC earns more returns from future exits.

Meanwhile, SBIC holdings in venture funds have declined from 49 percent of total assets in 2012 to just 24 percent last year. In contrast, loans to microlenders have increased from $12.4 million to $23.4 million in the same period, or from 34 percent of total assets to 59 percent.

Great repayment rates

Anne Haines

The microlending program is earning positive returns. Accion and The Loan Fund report 95 percent and 98.5 percent repayment rates, respectively. And the microlenders say SBIC funding allows them to steadily increase loan activity, putting more money into businesses throughout the state.

Accion, which recently rebranded as DreamSpring, has loaned SBIC money to 2,866 businesses in 179 New Mexico communities since 2004, said Accion President and CEO Anne Haines.

“SBIC has been a vital source of capital to put into entrepreneurs’ hands,” Haines said. “It’s helped us reach out extensively to communities throughout New Mexico to empower local families.”

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