Local Government as Lender: Emergency Loans for Small Businesses

<p>Economic activity can be disrupted by any number of unanticipated emergencies, ranging from natural disasters to virus outbreaks like COVID-19. When these events threaten the survival of small businesses, the owners may turn to government for assistance. One legal and effective way for a government to assist a small business with weathering a crisis is by providing an emergency loan. The loan allows the business to maintain operations when cash flow is severely constrained due to disruptions in demand. Loans are a common tool in these situations. For example, the federal Small Business Administration (SBA) offers disaster assistance loans to businesses that are impacted by natural disasters. SBA loans offer interest rates between 4% to 8% depending on a borrower’s ability to access other credit (see SBA disaster loan web page here). North Carolina is designated as eligible for SBA loans in response to the coronavirus outbreak.</p> <p>Local governments may have the means and desire to offer their own local loan programs for small businesses during a crisis. Such loans could provide financing for businesses that cannot qualify for SBA loans or may provide bridge financing until an SBA loan is obtained. This post provides legal and practical guidance for local governments who wish to design and offer such loans.</p> <p>Legal Authority</p> <p>When state constitutions across the nation were written decades ago, they included “gift clauses” to ensure that state and local governments did not make gifts to private entities (see this law review article). In North Carolina, a local government isn’t even allowed to make a donation to [...]</p>