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Small Business Technical Assistance: Sustainable
Economic Development
Introduction
During the spring of 1998, the Community Affairs Unit (CAU) of the Federal
Reserve Bank of San Francisco and the California Reinvestment Committee
(CRC) hosted a series of "Small Business Technical Assistance Forums"
(Forums) throughout the state of California. The Forums brought together
people interested in improving access to credit for small businesses and
included over 150 representatives from banks, technical assistance providers
(TA providers), state and local government and financial regulatory agencies.1
The Forums were held in San Francisco on March 31, 1998, in Los Angeles
on April 21, 1998, and in San Diego on May 26, 1998.2
Forum participants addressed the issue of how banks and TA providers
could partner more effectively to better meet the credit needs of small
businesses. The purpose of the Forums was twofold:
- Identify the major problems banks and TA providers face when working
together
- Solicit recommendations on how to address these problems and develop
effective bank/TA provider partnerships
This report analyzes the results of the Forums and submits five recommendations.
These recommendations address the problems banks and TA providers face
when working together and suggest action steps for developing effective
bank/TA provider partnerships.3 Each recommendation
highlights those issues that are specific to a particular community or
geographic region.
Why a "Small Business Technical Assistance Forum?"
Small businesses play a significant and growing role in the United States
economy. They employ 54 percent of the private workforce and create two
out of every three new jobs.4 According to
a 1997 study by McKinsey & Co., these small businesses require approximately
$19 billion of credit and financial services a year.5
Unable to turn to public investment markets, many small businesses rely
primarily on commercial banks for their financing needs. Not all of these
businesses, however, have access to commercial financial products and
services needed to grow and develop. A credit gap often exists between
banks and small businesses when small business owners lack the traditional
credit history and business experience judged by banks as necessary to
be traditionally "bankable." Unfortunately many of these small
business owners must rely on expensive credit card debt or turn to family
or friends to meet the capital needs of their businesses.
Partnerships between banks and TA providers can bridge this credit gap
and help small business owners access mainstream banking products and
services. These mainstream banking products and services tend to be less
expensive and more reliable and offer an alternative to relying on family
or friends who might not have the resources to support a small business
endeavor. TA providers play a variety of roles in helping small business
owners strengthen their business capacity by providing services such as
financial management assistance, business financing referral, loan packaging,
business incubation and in some cases small business loans. By providing
these services, TA providers help small business entrepreneurs transition
from relying on credit cards or family and friends to becoming viable
bank customers and successful business owners.
This transition is most successful when TA providers have strong working
relationships with banks. For example, after working with small business
entrepreneurs, TA providers often refer them to banks. Ideally these banks
are familiar with the referring TA provider and the quality of its services.
When reviewing loan applications from TA provider clients, bankers know
what type of technical assistance the clients have received and can consider
it "value added" in credit decisions. If there are problems
with applications, the bankers, TA providers, and small business entrepreneurs
can work together to address the concerns (e.g., rework the business plan
and adjust the loan amount). If credit applications are approved, TA providers
often work with banks to provide on-going post-loan assistance to the
small business entrepreneurs.
Many banks use partnerships with TA providers to meet Community Reinvestment
Act (CRA) requirements. Passed in 1977 and enforced by four bank regulatory
agencies including the Federal Reserve, the CRA mandates that banks have
a continuing and affirmative obligation to help meet the credit needs
of the local communities in which they are chartered to serve, consistent
with safe and sound operations. According to the CRA, banks can help meet
the credit needs of their local communities by financing small businesses.
By partnering with TA providers, banks can earn credit under the CRA's
lending, investment, and/or service tests. For example, bank financial
contributions to TA providers may be considered qualified investments
under the investment test. Bankers who serve in a financial capacity on
the board of directors of TA providers can expect such service to be evaluated
under the service test. Similarly, a bank loan to a small business entrepreneur
can receive consideration under the lending test.
In the past several years, the California Reinvestment Committee (CRC)
has pursued research efforts to study the role bank/TA provider partnerships
play in successful economic development. In a recent study, New Small
Business Lending Horizons, CRC documents how banks and small business
owners benefit from technical assistance. The study also highlights opportunities
for improving partnerships between banks and TA providers. Based on the
results of this study, CRC approached the Community Affairs Unit (CAU)
of the Federal Reserve Bank of San Francisco (FRBSF) to suggest hosting
technical assistance forums. These forums would allow banks and TA providers
an opportunity to talk face-to-face about the challenges of working together.
CAU was an interested and willing partner. As part of the FRBSF, CAU is
responsible for helping banks meet the credit needs of small business
owners as required by the CRA.
Together CAU and CRC designed the Forums to promote more effective bank/TA
provider partnerships and to bridge the credit gap that can exist between
small business entrepreneurs and banks.
Results of the Forum
The Forums started important dialogues between banks and TA providers
and allowed them to speak openly and directly about the problems they
face when working together. Participants discussed how difficult it is
to agree on "best practices" given the wide range and quality
of TA provider services and the diverse and often unstable funding sources
for TA providers.
By providing the opportunity to discuss and identify common concerns,
the Forums enabled bankers and TA providers to be clear about what they
need and expect from each other. During the Forums, banks and TA providers
identified five areas that need improvement. These areas include communication,
performance measures/benchmarks for success, financial product development,
funding, and regulatory incentives. After identifying these areas, participants
discussed possible solutions and next steps. These discussions formed
the basis of the recommendations in this report and established a foundation
for industry-wide "best practices" for bank/TA provider partnerships.
The following recommendations should ensure that the lessons learned in
the Forums will have a direct impact on how banks and TA providers work
together.
CAU, CRC, and/or others involved in the Forums could play an important
role in implementing these recommendations and could host a series of
follow-up "Small Business Technical Assistance Action Summits"
(Summits) in 1999. During these Summits, information would be offered
on many of the key issues identified in the recommendations. CAU, CRC,
and participants would provide updates on action steps taken since the
Forums, evaluate their progress, and decide what future actions are needed.
These Summits would help in moving forward with the recommendations of
this report and serve as a next step in building "best practices" for
effective bank/TA provider partnerships. These "best practices"
would help build a solid foundation for the technical assistance industry
and support sustainable economic development in our communities.
1
For the purposes of this report, small business is defined as a business
with gross annual revenues of $1 million or less.
2
Please see Appendix A for a sample agenda
and lists of participants.
3 For
the purposes of this report, it is assumed that readers are familiar with
TA providers, the Community Reinvestment Act and the small business lending
environment.
4 "Lori Mae Market,
Selected Excerpts from the Lori Mae Business Plan," Lori Mae, Portland,
OR, 1998.
5 McKinsey and Company,
"Unlocking Winning Strategies to Serve Small Businesses: Banking
the American Dream," Bank Administration Institute and McKinsey and
Co., Chicago, IL, 1997.
Sustainable Economic Development - Developing Effective Partnerships
Between Banks and Technical Assistance Providers
Helping Small Businesses Grow - Core Competencies of the Nonprofit
Technical Assistance Industry
Directory of Small Business Technical Assistance Providers in
California (May 1999)
If you have questions or comments, send a message to Community
Affairs.
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