Michigan Fund Links Beaten Down Banks With Capital-Starved Businesses

(MoneyWatch)  An innovative state program in Michigan is bridging the capital gap between small businesses and lenders, while also aiding local enterprises in sagging industries re-focus on growing sectors.

Launched in May, the pilot Michigan Supplier Diversification Fund helps businesses secure bank loans by providing financial collateral. For instance, the fund last month allocated $1.9 million to Maverick Industries, which allowed the manufacturing firm to land a $4 million loan to develop a business producing environmentally sound packaging. Another local enterprise, Wolverine Metal Stamping, received $1 million in funding as part of landing a credit union loan to enter the solar power sector.

This is smart policy. Small businesses around the country are having trouble raising capital, as banks tighten lending standards. As a result, such firms lack the cash flow to operate efficiently and the financial resources to grow. In the Rust Belt, that shortfall also reflects a long-term economic decline related to the aging manufacturing sector. Businesses in Michigan, for instance, have been whipsawed by the ailing auto industry and by the financial crisis.

One way government can help companies pull out of this dive, or at least soften the landing, is by acting as a conduit between public capital and private enterprise. The MSDF, which started with $12 million in state funding, helps bring lenders to the table that might otherwise shy away from making loans. Banks get a pipeline into promising businesses backed in part by the state. Capital-starved companies not only get a financial lift, but perhaps a new lease on life by diversifying into growth industries. And the state (and political officials) benefit by stimulating the creation of new businesses and jobs. Maverick Industries and Wolverine Stamping expect to add a combine 120 jobs, for example.

Other states, and perhaps the federal government, should explore whether this model could be applied more widely.