To prevent Berkeley’s entrepreneurial landscape from changing drastically, the city of Berkeley announced the creation of the Save-our-Small Business Loan Fund on Tuesday that will use both public and private capital to financially support small businesses.
Businesses with fewer than 50 employees are eligible for the SOS Business Loan Fund, which has a 2% interest rate over five years. The SOS Business Loan Fund will be used in conjunction with the Berkeley Relief Fund to keep businesses financially afloat during and after the COVID-19 pandemic.
UC Berkeley’s Haas School of Business developed the project proposal for the SOS Business Loan Fund in March, authored in part by Adair Morse, the director of the business school’s Sustainable and Impact Finance Initiative. According to Morse, the Haas School’s role in the SOS Business Loan Fund is to be a neutral party between the city of Berkeley and financial institutions.
“There is a shortage of small business capital,” Morse said. “The SOS loan is to tap into the vast amounts of private capital from wealthy individuals and institutions.”
According to City Councilmember Sophie Hahn, the SOS Business Loan Fund will have an expected default rate of about 20%. Repayment from lenders back to the fund will pay private investors before the city of Berkeley, however, making default rates for private investors artificially low and thus incentivizing them to contribute, Hahn added.
“This program has the potential to use a small amount of public funds in city dollars to attract private capital to create a loan fund to provide very-low-interest loans to local businesses,” Hahn said.
According to Hahn, the city of Berkeley is financially interested in maintaining its small businesses for the tax base because it will see a full long-term payoff.
While the interest rate is low, Morse said it must still remain close to market value to attract investors.
Many of these investors are part of the Berkeley community and have an interest in maintaining Berkeley as they know it.
The city of Berkeley is also making the Berkeley Relief Fund available to support small businesses by covering essential costs, such as rent, while they have a significantly reduced income during the pandemic.
If the city of Berkeley fails to provide the necessary support to small businesses, Hahn said there may be many empty storefronts and much of Berkeley’s spirit could be lost.
“Everybody needs to be very aware that when we come out of this very dark tunnel, the landscape is going to look very different,” said City Councilmember Susan Wengraf. “We need to make sure small businesses that contribute to Berkeley can come back when this is all over.”