State auditor evaluates economic benefits of funding small business

By Sun Advocate

A report released last month by the office of the legislative auditor general indicates that a fund set up several years ago by the state to aid economic growth in the southeastern part of Utah has provided economic benefits to the area.
The report regarding the southeast Utah small business investment fund came at a time when the program operators are asking the legislature to approve $2 million in general revenues to support economic activities in Carbon, Grand, Emery and San Juan counties along with expansion plans for Duchesne, Daggett and Uintah.
The program was designed to aid low income families with seed money to start small businesses.
It began originally under a grant program called TANF – temporary assistance to needy families.
The goal of the program was to help families start the small businesses and provide more jobs for the community.
“This has been a successful program,” explained Karl Kraync, chair of the small business investment fund committee in southeastern Utah. “There has been a national effort to get this program started in many places, and our area is a good example of where it has worked well.”
The report issued by the legislative auditor general points out that the SEUSBIF program “has provided some economic benefits to the rural communities they have served” and that the benefits to the area has “exceeded” the costs of operating the program.
The report noted that 42 percent of the businesses that were started with the funds are still operating and the business spending by the companies has doubled the amount of money originally appropriated for the project.
The figures bode well for the program.
Nationally, according to Dun & Bradstreet, failure rates on start up businesses exceeds 80 percent after five years.
The majority of business failures occur because of poor management and the program works to approach the problems with the new business owners.
The original southeast Utah small business funding program ran between October 2001 and September 2003, establishing a fairly long track record of success versus failure.
The report also states that the program has been administered efficiently and the administrative costs have been kept at a low level.
The report identifies one area where the auditor’s office felt the program could improve.
The area for improvement involves getting participants completely off any kind of public assistance in the short run.
It states that during the administration of the program the state still paid out $98,000 in public assistance and $28,000 in unemployment insurance to some individuals participating in the program.
The economic benefits derived from the program were due to two main sources of cash flow, explains the state auditor’s report.
One source was that the businesses set up by the program spent a good deal of money on materials and supplies and the other was that the funds actually created lasting jobs in the area.
Because these were small start-up businesses the job numbers were limited and the average wages paid by the companies to workers were below what the average wage earner makes in the affected areas.
Concerns have been voiced that the program “displaced” workers in other businesses, thereby negating any positive consequences of the funding program.
However the auditor’s report notes that, while documentation for the program at the grassroots level was fairly limited “by and large, the jobs created by SEUSBIF did not appear to be jobs that typically displace others in the economy” of an area.
“This kind of a program is the quickest and most efficient way to generate jobs in a area such as ours,” stated Kraync.
The report was completed by sampling 22 businesses that were set up by the program.
Of the total number of program participants, 19 businesses were still being run by the original owner, one was no longer operational and one had been sold, but was still operating. One other business was still operating, but had been moved to Idaho.
The businesses, the state auditor’s report was ascertained, had spent more than $1.6 million within the local economy in 2004 and 2005.
On average the sampled businesses also increased the companies’ local spending by $14,767 between the two years.
In 2004, the businesses averaged $35,114. In 2005, the companies spent $49,881.
One of the participants in the funding program had grown so much that the business spent more than $200,000 in the local economy.
“The initial program paid for itself in three years,” said Kraync. “The audit only took a section of the businesses that were started. I think if you looked at all the businesses that have been successful from this program instead of doubling the investment it is actually four times the initial funds expended.”
The Southeastern Utah Association of Local Governments was the legal entity administering the small business funding program under the direction of the SEUSBIF advisory board.
The advisory and funding committees were comprised of members from the Small Business Development Center (SBDC), county economic development staff, the Utah Department of Workforce Services, vocational rehabilitation, SEUALG and organizations deemed appropriate and necessary to carry out the mission of the program. Examples include the College of Eastern Utah.
The SEUSBIF program operated under a TANF grant from the department of workforce services that totalled $790,616.
Workforce services contracted with SEUALG to administer the SEUSBIF program.
A qualifying participant had to have a household income registering at or less than 200 percent of the federal poverty level and have at least one dependent child.
The federal poverty level is determined by the U.S. Census Bureau.
For example, if the poverty level for a household of five members was $20,000 annually, to be eligible for the SEUSBIF program the total household income could not exceed $40,000 – 200 percent of the poverty threshold.
Once eligibility was determined, participants had to complete an intensive course in preparing business plans called NxLevel. NxLevel is administered by the SBDC.
If participants successfully completed NxLevel, the business plan was submitted to the funding committee for consideration. The committee decided which projects SEUSBIF would support and the amount of funds the proposed business would receive.
Once approved, the selected businesses were provided seed capital from TANF funds ranging from a minimum of $1,000 to no more than $10,000 to help cover the legitimate start-up expenses of the operations.
The start-up expenses included equipment, licenses, rent, phones and so forth.
Additional funds, if needed, were sought by the start-up business.
The additional monies could be personally held assets, a bank loan or other available funding programs.
An important factor in administering the funds was that SEUSBIF funding was never provided to program participants, but was paid directly to vendors for start-up expenses.
Further funding for the program will be considered during next year’s session of the Utah Legislature that begins in January.
“The program has validated itself,” pointed out Kraync. “Now we need some serious funding for phase two and once that is completed the program could easily go statewide.”