Use of Recovery Act Funds in Small Business Lending
The American Recovery and Reinvestment Act (ARRA) has earmarked about $1 billion to be used to promote financing of energy efficiency and renewable energy projects, mostly for residential programs and in a few cases for small commercial programs. At the time this guide was written, many of those programs were still under development. ARRA funds can be used to facilitate small business efficiency improvements in a number of ways as described below.
It is important to note that commercial and industrial contracts over $2,000 are subject to the National Environmental Policy Act (NEPA) requirements and the Davis-Bacon Act (DBA), meaning prevailing wages must be paid on the project. In the few states where the prevailing wage is already similar to the existing wage, Davis-Bacon may not be an obstacle. However, DBA and NEPA are potential pricing challenges that exist for commercial and industrial projects that do not exist in the residential market. For more information on the Davis-Bacon Act, visit the U.S. Department of Energy Weatherization & Intergovernmental Program website.
ARRA funds can serve as capital for loans made directly to small businesses. If the grantee wishes to manage its own fund, it must first decide whether or not it has the skill set, staffing, and software needed for originating loan applications, credit underwriting, document preparation, and loan servicing. Many of those services can, in fact, be outsourced to specialty organizations, Community Development Financial Institutions (CDFIs), other revolving loan funds, nonprofit organizations, or commercial lenders. The leverage on such direct lending is limited to how quickly the loans mature. As one example, Colorado is using State Energy Program (SEP) funds to provide loans to clean energy companies (small businesses), originated through the Colorado Housing Finance Authority (CHFA).
Direct Loan Capital Supplemented by Private Capital Commitments
Some grant recipients are able to entice other lenders to participate in a revolving loan fund. For example, Phoenix, Arizona, is developing a program that will mobilize $4 million of ARRA funds to seed a pool of funds to which other capital providers would add their own loan capital to assist small businesses in implementing clean energy projects. Other grantees are trying to set up financing for small businesses that would have participation agreements with large national banks, which, in turn, would receive Community Redevelopment Act (CRA) credit because of the dire economic situations in the grantees’ locales. In such cases, ARRA funds would be used for direct loans, interest rate buy downs, and loan loss reserves.
Another way for grantees to increase the leverage of other funds is by providing credit enhancements to attract third-party capital (see Security in the Primer on Lending). Such credit enhancements can come in the form of interest rate buy downs and loan loss reserves. Note that working with traditional third-party lenders (banks, credit unions, etc.) may be a way to quickly jump-start a clean energy loan program. Most lenders will not be excited about creating a new financing program or loan product unless they feel that substantial volume can be generated as a result of the program. They will, however, be interested in the marketing support the grantee will be providing to the program, as lenders are always looking for ways to find new customers. Banks, for example, welcome new customers because they see them as an opportunity to cross-sell other financial products (i.e., payroll and retirement accounts, Christmas or vacation savings clubs, etc.). Another example, also from Colorado, is a new program through which the CHFA offers a loan loss reserve to participating financial institutions that make loans to support qualifying clean energy projects.
Preliminary Energy Efficiency Audits and Technical Assistance
ARRA funds may also be used to pay for preliminary energy efficiency audits. When appropriate, and if the project is large enough, it may be possible to include the cost of those audits as part of the project cost when financing, thereby allowing the grantee to recover and recycle funds for that service.
Marketing and Administrative Expenses
ARRA funds may be used for administrative expenses (subject to a cap of 10% of the total Energy Efficiency and Conservation Block Grant or SEP grant), marketing costs, hiring a third-party administrator, and other related administrative costs.