A state agency tasked with distributing more than $80 million to Virginia businesses affected by the COVID-19 pandemic has not been effective at loaning money in the recent past, according to a report from the Joint Legislative Audit and Review Commission.
In 2018, the Virginia Small Business Financing Authority let 92% of the $25.7 million it could loan to small enterprises sit unused after getting just 72 applications, down from 145 the year before. In 2019 it got even fewer applications, 59, and didn’t lend 90% of the $31.1 million it had available. So far this year, it’s gotten 67 applications and loaned 24% of $33 million on hand.
One bank cited in the report wrote to the authority to say, “In the last couple of years I have referred three borrowers to your group, all of which were declined due to poor credit quality … The last deal we referred, you declined because the credit quality was too good … I am very confused about your goals in helping small business.”
There is no lack of need among small businesses. Access to credit improved in recent years and the number of small businesses unable to find traditional financing nationwide between fiscal year 2016 and 2019 shrank by 17%. However, access to capital was still cited as “a top challenge” for small businesses by several Virginia business organizations in late 2019 and early 2020 before the pandemic, the report says.
Now, the agency is responsible for divvying out $70.7 million in COVID-19 relief grants to businesses with no more than 25 employees and $1.5 million in revenue and another $10.2 million in a pandemic relief loan program. It began taking applications for the former, which allows for grants worth up to $10,000 each, in August.
“Experts predict commercial banks may become more restrictive with business lending, making VSBFA a critical funding source for small businesses,” according to the JLARC report. “In this environment, it is especially important for VSBFA to operate its financing programs efficiently and effectively, particularly as staff begin administering two new COVID relief programs.”
JLARC’s report said the agency had been too risk-averse, operating more like private banks and not as a government agency meant to aid businesses that aren’t eligible for traditional loans. The report did acknowledge the challenge of being a good steward of public money while also helping small businesses get loans they wouldn’t otherwise be eligible for.
Despite the low level of lending, the report says surveys of recipients and stakeholders said the loans were helpful and the staff was knowledgeable and responsive.
JLARC found that a high turnover in leadership and loan officers has hampered the authority. After its longtime director retired, the authority had five executive directors, interim and permanent, in three years. The current leader has been there since October.
In those three years, it often had just one of its three full-time loan officer positions filled. There was only a six-month period when all three positions were staffed, according to the report. One of the three left in August.
The VSBFA is part of the Department of Small Business & Supplier Diversity (SBSD), which was the focus of JLARC’s audit.
On Monday during the report’s presentation to the commission, the group’s chair Del. Kenneth Plum, asked SBSD director Tracey Wiley if they could rest assured the COVID-19 relief money would get out to where it’s needed.
She said 187 grants worth $1.5 million have been dispersed and 3,000 applications had been submitted. She said her agency had asked the administration for eligibility requirements to be loosened, namely to allow businesses that had received other CARES Act funding to be eligible.
As for the agency’s turnover, she said that when hiring its new director, it was difficult to compete with private-sector salaries and benefits, and they had wanted their new director to be able to hire his or her own team. Howard Pisons, the former president and CEO with Community Bankers’ Bank of Midlothian, was hired in October and came to the organization with a 100-day plan that was interrupted by the pandemic, she said. The report says he’s viewed positively by the staff and the board.
Other findings by the legislative watchdog found that the state’s method for certifying small businesses for the purpose of awarding state contracts to small women-owned and minority-owned businesses has allowed high-revenue businesses to be included. As it is, in Virginia, a business has to either have fewer than 250 employees or $10 million in average gross receipts but not necessarily both, to qualify. The report said the top 5% of businesses by size had average gross receipts that exceeded $25 million.
The report found one particular anomaly, a certified small business that had fewer than 250 employees but had annual gross receipts of $397 million.
The report suggested the General Assembly could change the definition of a small business to consider both employee size and gross receipts.
