State prepares to deploy $237M for small businesses through loans, VC fund investments

Nearly $237 million in federal funding coming to the state is planned to support small businesses in Michigan through lending initiatives and equity investments in venture capital funds.

The Michigan Economic Development Corp. (MEDC) aims to deploy the federal funding across five programs, including investing $75 million in one or more venture capital funds operating in the state.

In partnering with early-stage venture capital investors, likely as a limited partner, the MEDC wants to leverage private capital investments and the expertise of venture capital firms, said Chris Cook, the MEDC’s managing director of capital access.

“We want to rely on the private sector, its decision making and its expertise, to identify opportunities that have the highest likelihood of success,” Cook said.

The MEDC will likely issue requests for proposals or open an application process for venture capital firms interested in partnering with the Venture Capital Program, he said.

Ara Topouzian, executive director of the Michigan Venture Capital Association, expects the MEDC will find interest from venture capital firms, although the initiative “is not going to be for every firm.”

Depending on conditions that the MEDC issues for partnering with the Venture Capital Program, “some of the smaller firms might be interested,” Topouzian said.

“It’s too early to tell, but I would fully expect that people might take advantage of it and we might see formation of some new funds from it,” he said. “The ultimate result is we want to see startups getting funded. Whenever you can provide funding like this, it’s a great opportunity for the startup community.”

The planned Venture Capital Program is part of a broader Michigan Business Growth Fund 2.0 that the MEDC has planned to use up to $236.9 million in federal funding. Small businesses participating in a program would have to match the public funding with private capital, Cook said.

The money for Michigan Business Growth Fund 2.0 would come from the $10 billion allocated for the federal State Small Business Credit Initiative that was included in the American Rescue Plan Act signed by President Biden in March 2021.

On Tuesday, the Michigan Strategic Fund Board approved the formation and guidelines for Michigan Business Growth Fund 2.0 that consists of both capital and credit programs, some of which have been in existence for a decade and will use the new infusion of federal funding.

The MEDC intends to submit an application to the U.S. Department of Treasury by Feb. 11 detailing plans on how Michigan intends to use the federal funding. The MEDC hopes to have a decision from the Treasury Department within 60 to 90 days, Cook said.

In forming the Michigan Business Growth Fund 2.0, the MEDC looks to fill gaps in the access to credit and capital for small businesses. 

“Overall, the goal is to allow small businesses an opportunity to obtain loans or investments that otherwise may not be available,” Cook said. “In our view, there is certainly a very significant need.”

The MEDC would work with organizations such as federally designated community development finance institutions (CDFI), community banks and credit unions on the lending programs that are part of the Michigan Business Growth Fund 2.0, Cook said.

Under federal guidelines for the State Small Business Credit Initiative, Michigan has to steer $39.8 million of the federal funding to small businesses that are owned by socially and economically disadvantaged individuals. Another $12.9 million would have to go to “very small businesses” that employ 10 people or less where the need for more access to capital is particularly high, Cook said.

“We’ve heard from sources throughout the state that capital availability is a significant issue for those companies,” he said. “Developing programming and increasing the availability of capital to those that you would call ‘Main Street’ businesses, there is a significant need and that really drove a significant portion of our thinking in terms of the allocation.”

Michigan Business Growth Fund 2.0 would support small businesses in an array of sectors: manufacturing, professional and corporate services, engineering, design and development, financial services, mobility, medical device technology, high-tech agriculture, tourism, and logistics.

The MEDC hopes small businesses that receive support through the Michigan Business Growth Fund 2.0 will leverage the funding with $2.42 billion in private-sector investments.

“That, obviously, is potentially a very big impact to the state,” Cooks said.

In addition to the $75 million Venture Capital Program, Michigan Business Growth Fund 2.0 includes:

• $71 million for an existing Collateral Support Program that provides bridge financing to small businesses that lack the collateral needed for a commercial loan.
• $48.2 million for a Loan Participation Program to “bridge financing gaps that may exist based on a lack of ability of the borrower to repay in the short-term or a limitation in the amount of funding that a lender is able to provide based on legal lending limits or portfolio concentration,” according to an MEDC staff memo.
• $40.2 million for a Loan Guarantee Program that’s intended to mitigate the risk for a small business lender by providing a partial guarantee on a new loan. The MEDC’s existing Loan Guarantee Program provided up to $5 million in loan guarantees for small businesses that supported $14.2 million in lending with minimal losses of just $183,000.
• $2.3 million for the MEDC’s existing Capital Access Program to support lenders that provide financing to small businesses that may not otherwise qualify for a loan.

The MEDC modeled the Michigan Business Growth Fund 2.0 after a similar initiative that originated in July 2011 using $79.6 million in federal funding that went to loan and collateral support programs. The funding primarily went to manufacturing companies hurt by the Great Recession. Companies that secured support from the initiative were able to leverage the funding and generate $606 million in private sector investments.

The MEDC a decade ago also used the federal money for capital access and loan guarantee funds and a mezzanine fund.

The average loan size for small businesses under the existing programs is less than $100,000, Cook said. The new initiative “has the potential to support a couple thousand very small businesses” through the lending programs, he added.