This piece was originally published in the Techno-Industrial Policy Playbook.
Summary
The Small Business Administration (SBA) possesses uniquely strong and underutilized authorities for supporting innovative American manufacturers. Congress has not passed legislation reauthorizing SBA since 2004, presenting an opportunity for a future reauthorization to leverage SBA's loan and investment authorities toward manufacturing and hard tech startups. Congress should reform the Small Business Investment Companies (SBIC) program to streamline fund applications and enhance the leverage available for investments in key manufacturing sectors; create an Innovation Growth Loan program to provide innovative manufacturers with scaling capital; and modify SBA's small business criteria to make it easier for manufacturers to expand beyond their "small" status without an abrupt loss in eligibility.
Problem
Rebuilding America's industrial base will require growing a robust ecosystem of small and medium manufacturers, as even the largest manufacturers in the United States rely on smaller manufacturers and parts suppliers throughout their supply chain. However, the patient forms of debt and equity financing best-suited to manufacturing are chronically undersupplied in the US context. Rich nations with resilient manufacturing sectors, such as Israel and Germany, address these gaps in financing with industrial development banks.
While the US could adopt a similar approach by creating its own development bank, leveraging the latent authorities of the SBA offers a simpler path forward. Indeed, as an offshoot of the Reconstruction Finance Corporation, the SBA already has many if not most of the authorities associated with a development bank, from loan guarantees to equity issuance. The SBA's long-overdue congressional reauthorization thus provides an opportunity to redirect these authorities toward bolstering and scaling innovative small and medium manufacturers, including the sorts of hard-tech startups that venture capital has traditionally overlooked.
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