Mike O'Donnell | May. 22, 2019

Are You Ready for the Country?

The mission of the US Small Business Administration (SBA) is to help Americans “start, build and grow businesses” but given that the vast majority of their programs are offered through banks, and banks are motivated by profit and micromanaged by a plethora of regulators (who don’t want banks to take on any risk), it is challenging for SBA programs to reach the historically underserved categories of small business owners who most need funding but typically don’t have the same credit profiles as the average Americans most banks prefer to work with.

For example, about 27% of all SBA guaranteed loans, which is the program that the SBA is best known for, are currently being made to minority-owned businesses, yet minority-owned businesses account for approximately 40% of all small businesses in America. And only 17% of SBA guaranteed loans year-to-date are going to women-owned businesses, yet women-owned businesses account for 39% of all small businesses and women are starting new businesses at twice the rate that men are.

To redress the fact that access to SBA loan programs is uneven across the small business community, focused programs are created from time to time in response to Congressional pressures, a new Administrator, or some other reason, in an effort to provide more inclusive access to available SBA programs.

A great example of this over the last decade has been the creation of SBA’s Community Advantage loan program which allows non-profit lenders like Colorado Lending Source, Accion and Colorado Enterprise Fund here in Colorado to offer SBA guaranteed loans of up to $250,000.

The thinking behind the Community Advantage program was that because of additional regulations imposed on lenders after the great recession, it was becoming uneconomic for many banks to make smaller business loans like they used to. So if you allow non-profit lending entities into the mix to help fill that gap, and attach mandatory targets (the SBA can’t impose activity targets on banks) so that at least 60% of all new Community Advantage loans are being made to historically underserved categories of small business owners, more loans to a more diverse population of small business owners will result.

The SBA is still testing the Community Advantage program so it is currently operating as a pilot program within the agency while they decide whether it is achieving its objective. Congress really likes the program because it makes an effort to reach the underserved small businesses most in need of affordable growth capital so they would like it to become a permanent program. These discussions are going on up in Washington DC as I pen this, but that is a horse of a different color and not the reason for this article.

The actual point of this article is that I wanted to draw your attention to the latest SBA initiative to provide more widespread access to SBA programs. This is known as the Rural Initiative Pilot Program and is focused on making more SBA 504 loans available to businesses in rural communities.

For those of you who don’t know, the SBA 504 loan program is the only SBA product with an economic development focus and, as one of the few examples in the world of a public sector / private sector partnership business loan program that actually works, is a program that allows a small business to buy/build/improve a building they operate out of or buy a large piece of equipment they use in their business, with a defined down payment of typically 10% and a very low fixed interest rate for 10, 20 or 25 years.

Two interesting things about this new Rural Initiative Pilot Program: (1) around 17% of all SBA 504 loans nationally are currently being made in rural communities, which is on par with the fact that about 17% of all small businesses in America are rural-based, so I’m really not sure why this has become an emphasis, and: (2) the SBA has decided to redefine what is “rural” to exclude many communities that were formally considered as rural, and this new definition is both illogical, nonsensical and silly.

And this gets me to the crux of my post today.  The SBA’s new definition of what is considered “rural”.

To be fair, the SBA didn’t invent this definition. They borrowed it from some urban east coast wag at the Census Bureau who invented it and somehow or other convinced others that it was a good definition of rural. But it isn’t a definition of rural at all -- it is just a way of recognizing population concentrations in counties and that definition might be interesting to academics but it has no real practical application to economic policy initiatives, which is why I have a beef with the SBA for adopting it.

To be specific, the “new” Census Bureau definition has determined that when less than 50% of the population within a county live in rural areas (i.e. outside towns or cities), that county is a “mostly urban” county. If somewhere between 50% and 99.9% of the population of that county live in rural areas, the county is classified as “mostly rural”. And if 100% of the population of the county live in rural areas, then that county is “completely rural”. (Yay!)

I’m sure this all makes sense to you.

Of course, the SBA could have borrowed the US Department of Agriculture (USDA) definition of rural, the one that they use for all their small business loan programs, but I suppose that would have been too easy …. But I digress.

The beef I have with the SBA’s adoption of the Census Bureau definition of “rurality” is that it further works to exclude already underserved small business populations, particularly because this new definition will likely be applied to the Community Advantage loan program in addition to the pilot Rural Initiative 504 program.

Let me give you a practical insight into why I feel that this new definition is way more than silly.

I live on a small farm in Yuma County, Colorado, over near the Colorado / Kansas line. Our house is three miles north of the boundary between Yuma County and Kit Carson County and six miles east of our closest town, which has a population of 59 people.

The new SBA definition considers Yuma County to be “mostly rural” and Kit Carson County three miles down the road from us, as “mostly urban”. This latter designation is probably big news to all 8,270 residents of Kit Carson County, especially given the fact that things are pretty spread out there with only 3.7 people per square mile in Kit Carson County.

There are 10,043 of us in Yuma County and our population density is 4.2 persons per square mile. One might logically think that Kit Carson County, with a lower population density, is relatively more rural than Yuma County. But no. According to the SBA, Kit Carson County has the same “mostly urban” classification as Denver County, where there are 3,616.8 persons per square mile.

I’m happy to explain to the powers that be at the SBA, should they listen, that the Census Bureau’s measure of rurality in no way shape or form identifies whether or not a county is rural. A far simpler measure is population density, and that doesn’t even involve anyone at the Census Bureau using a slide rule to calculate how many people live inside or outside towns. Adopting the existing USDA definition of whether or not a business is located in a rural community is even easier, and if any reader would like to see if they actually live in a rural area, using a proper definition of rural, just click here.

At the risk of laboring my point, Kit Carson County had 704 farms in 2012 (down from 786 in 2007) and the average size is getting larger as the number of farms shrinks. It is at 1,945 acres per farm now, which is much bigger than any farm you will find around Washington DC.

Interstate 70 goes smack dab through the middle of Kit Carson County and the five communities there, Burlington, Stratton, Siebert, Flagler and Vona, are all, naturally enough, located on the interstate highway to help provide essential services to cross-country travelers in addition to the normal services you would find in any rural community. The largest town is Burlington and when a major employer, a privately-run prison, closed there in 2016, the population of Burlington dropped from 4,200 to 3,600 after 142 jobs were eliminated from the community and many families moved away.

Kit Carson County certainly isn’t “mostly urban” nor will it ever be in my lifetime. Nor should it be penalized because farms are bigger there and the towns are smaller, which is essentially what the SBA is doing.

And it isn’t just Kit Carson County being singled out. The newly minted SBA definition of “rural” reclassifies Alamosa County (population 15,445), Bent County (6,499), Chaffee County (17,809), Lake County (7,310), Las Animas County (15,507), Moffat County (13,795), Pitkin County (17,148), Prowers County (12,551) and a bushel basket full of other Colorado counties as “mostly urban” now. Which they certainly are not.

The message I would like to extend through this simple little article to any of you who are involved with crafting economic development policies, particularly at the federal level, is please, please, PLEASE don’t embarrass yourself by complicating something as simple as whether a community is rural or not by adopting some illogically complicated, nonsensical and, yes, incredibly silly definition.

If you do, I will write a blog about you and share it with both of my readers.  

And, if you'd like to learn more about this topic, tune in to my first ever Facebook Live Event on May 30th at 10am.

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