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Va. authority takes ‘overly conservative’ approach to small business loans, report says

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(Ned Oliver/ Virginia Mercury)

Virginia isn’t doing an adequate job of lending out money to help small businesses, according to a new report from the Joint Legislative Audit and Review Commission that found tens of millions of dollars have sat unused in recent years.

In a presentation to legislators Monday morning, JLARC staff said the Virginia Small Business Financing Authority is taking an “overly conservative” and risk-averse approach to its lending practices. 

In the last three budget years, auditors found, most of the money available through the VSBFA’s programs was not loaned to businesses seeking assistance.

In fiscal year than ended in June of 2018, 92 percent of $25.7 million in available funds was unused. That number improved somewhat by fiscal year 2020, when 76 percent of $33 million went unused. Still, JLARC concluded the authority “has not been meeting most key criteria for effectiveness.”

“Without policies and a tool to govern loan decisions, VSBFA has tended toward caution and generally been too conservative when making loan decisions,” JLARC wrote in its report. “This is inconsistent with the authority’s mission to provide gap financing to businesses who may not be eligible for private bank loans.”

The number of loan applications filed with VSBFA has also declined, falling from 145 in fiscal 2017 to 67 in fiscal 2020. Several banks told JLARC staff the authority was too risk-averse, the report says, with one banker saying “after several unsuccessful attempts to partner, I just gave up on having the VSBFA as an option.”

The authority’s low loan default rate, JLARC reported, suggests it’s operating more like a private bank than a publicly run program designed to make riskier loans.

“This suggests that VSBFA has room to make loans to businesses with a higher default risk,” said Lauren Axselle, a JLARC analyst who led the review.

The financing authority is a division of the relatively small Virginia Department of Small Business and Supplier Diversity, but it has its own executive director and a board of directors that makes final funding decisions. Through a variety of loan and grant programs, the authority provided about $3.8 million to support small businesses in fiscal 2019, according to JLARC. Almost 70 businesses were approved for funding that year.

However, the authority’s mission is set to expand substantially due to the COVID-19 crisis. The VSBFA is administering the $70 million Rebuild Va Grant Fund, which will make federal CARES Act money available to some small businesses whose operations have been disrupted by the pandemic.

Several legislators said they were concerned by the report’s findings at a time when support for small business is seen as critical to Virginia’s recovery.

“The lending piece is not good at all,” said Del. Kirk Cox, R-Colonial Heights.

“What mechanism can we use to replace the whole top management? They have serious problems,” said Sen. Lionell Spruill Sr., D-Chesapeake.

Del. Ken Plum, D-Fairfax, JLARC’s chairman, reminded Spruill that the General Assembly can set policy, but personnel decisions are up to the Executive Branch.

Commission staff suggested some of the authority’s issues can be explained by turnover in top jobs. They noted the authority has had five permanent or acting executive directors in the last three years, adding that government lenders often struggle to retain workers due to salary competition from the private sector. 

The authority’s current director, former bank executive Howard F. Pisons, was hired a year ago and is “viewed positively by staff and board members,” the report said. In an email, Pisons declined to comment on the report.

In an interview, Tracey G. Wiley, the director of the state’s small business department, said some of the authority’s challenges arose from a struggle to recruit a replacement when a former executive director retired after nearly two decades in the job.

“I think that part of that decline was just that we didn’t have enough boots on the ground at the time during the transition,” Wiley said.

Auditors recommended the authority strengthen its lending policies to better match its mission, beef up its marketing efforts and craft a comprehensive improvement plan that would be due to the General Assembly next summer.

Wiley said her agency has already agreed to take corrective action to address the report’s findings.

She said she’s confident the $70 million business relief grant can be administered effectively, noting that $1.5 million to $2 million has already been approved after the state saw more than 3,000 applications.

“The teams are doing a very good job of moving the funds,” she said.

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