What Local Governments Should Know about Creating Emergency Business Loans

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The UNC School of Government’s Development Finance Initiative (DFI) provides financial and development expertise to communities interested in neighborhood redevelopment and redevelopment, downtown revitalization or affordable housing projects, among other initiatives. DFI helps these communities attract the private investment necessary to successfully finish their desired projects. Since its inception in 2011, DFI has partnered with 85 North Carolina communities and has assisted with more than 150 projects. Now, in light of the COVID-19 pandemic, more communities are relying on DFI’s expertise to help bridge the gap between federal, state and local economic relief programs.

COVID-19 has created or exacerbated the financial burden for many North Carolinians. This is particularly true for small business owners and employees. According to DFI, 85 percent of businesses in North Carolina are classified as small, or having fewer than 20 employees. Of those small businesses, 56 percent are in primary or secondary “high-risk” sectors (those that are more burdened by COVID-19) such as food and retail (primary) or real estate and manufacturing (secondary). Together, these businesses employ half a million North Carolinians and are responsible for generating $7 billion for our state’s economy. But due to the financial complications associated with the pandemic and our new way of life, many of these small businesses are at risk of permanent closure. The effect of mass business closures would reverberate throughout our state for years to come.

While federal and state governments have recognized the importance of investing in small businesses, proposed relief programs are months away from being fully implemented. Many businesses cannot afford to wait any longer and are at risk of closure if they do not receive immediate assistance. The catch is that local governments interested in offering immediate assistance are not permitted to make “gifts” (i.e., grants) to private entities, in accordance with North Carolina’s constitution. To bridge the gap and remain constitutional, DFI has helped local governments create small business emergency loan programs, which serve as a temporary solution. DFI recently assisted the governments of Belmont and Fayetteville. Both serve as examples of how emergency, or bridge, loan programs may be successfully replicated in communities across the state.

The town of Belmont initiated a “Keep the Lights On” campaign, which encouraged people to order takeout meals and shop locally in the hope of offsetting financial hardships for local businesses. But government officials realized such efforts alone were insufficient. Adrian Miller, Belmont’s city manager, contacted DFI and made a pitch to the Belmont City Council for a small business emergency loan program. Miller’s pitch was approved by the council, which provided $400,000 for the program’s funding.

Belmont is able to run the program in-house. Government officials review applications, run credit checks and determine whether a business was profitable or would have survived in the absence of COVID-19. Once an application is reviewed, qualified applicants can receive a maximum loan amount of $10,000 at a 7 percent interest rate. The loans are unsecured and mature over a 36-month period, but recipients do not have to make interest payments during the first 12 months. To disseminate information about the program, Miller has relied on Belmont’s membership organizations, as well as traditional media.

Due to Belmont’s relatively small size, their emergency loan program implementation may look different compared to a larger municipality’s. For example, Fayetteville has neither the capacity nor the software to adequately operate a loan program in-house. Cynthia Blot, the City’s director of economic and community development, has been working with a third party to develop and administer a loan relief program. CEED, the Center for Economic Empowerment and Development, is a Fayetteville nonprofit that supports community members through various programs, including providing small business loans. Because of their expertise in providing loans, CEED has agreed to take on the responsibility of reviewing and approving loan applications.

Suzy Hrabovsky, executive director of CEED, and Blot successfully pitched a loan program to the Fayetteville City Council at the beginning of May. The program sets aside $250,000 in funding and, similar to Belmont, $10,000 loans will be given to eligible applicants. Full implementation will follow within the next few weeks. Hrabovsky and Blot have used press releases, newspaper articles and social media to disseminate information about the program.

The needs and implementation of small business emergency loan programs will look different for every community. Some things to consider include: Will the program be run in-house or via a third party? What are the loan eligibility requirements? What will the loan amount be? And how and by whom will the loans and loan payments be tracked?

There is risk associated with using taxpayers’ money on loans for small businesses, but it is important to consider the substantial risk associated with letting small local businesses fail. As Adrian Miller states, like Belmont, many other municipalities across North Carolina have spent decades trying to revitalize their communities. That work could be lost in the span of a few months if businesses permanently shut their doors due to a lack of assistance. Many communities are deciding these loans programs, while posing some risks, are worthwhile compared to the devastating effects that could result from large numbers of shuttered businesses.

If your community is interested in starting a small business emergency loan program, contact DFI for a free, one-hour consultation. More information on consultation services and how to implement emergency loan programs can be found here.