May municipalities use ARP funds to invest in small businesses in the community or private sector start-up investment funds to support economic growth?

According to Guidance from the U.S. Department of the Treasury ("Treasury"), municipalities may use American Rescue Plan ("ARP") funds to address a wide range of small business needs. The ARP created the Coronavirus State Fiscal Recovery Fund and the Coronavirus Local Fiscal Recovery Fund (together, “CSLFRF”).[1] Treasury’s Final Rule, issued on January 6, 2022, authorizes recipients of these funds to use the assistance in several ways, one of which is:

to respond to the public health emergency with respect to the Coronavirus Disease 2019 (COVID–19) or its negative economic impacts, including assistance to households, small businesses, and nonprofits, or aid to impacted industries such as tourism, travel, and hospitality.[2]

The Final Rule clarified the ARP's authorized uses of CSLFRF for impacted small businesses as follows:

Loans or grants to mitigate financial hardship such as declines in revenues or impacts of periods of business closure, for example by supporting payroll and benefits costs, costs to retain employees, mortgage, rent, or utilities costs, and other operating costs;

• Loans, grants, or in-kind assistance to implement COVID-19 prevention or mitigation tactics, and
• Technical assistance, counseling, or other services to assist with business planning needs.

Treasury acknowledges a range of potential circumstances in which assisting small businesses could be responsive to the negative economic impacts of COVID-19, including for small businesses startups and microbusinesses and individuals seeking to start small or microbusinesses. For example […]

A recipient could identify and respond to a negative economic impact of COVID-19 on new small business startups or microbusinesses; for example, if small business startups or  microbusinesses in a locality faced greater difficulty accessing credit than prior to the pandemic or faced increased costs to starting the business due to the pandemic or if particular small businesses or microbusinesses had lost expected startup capital due to the pandemic.

The interim final rule also discussed, and the final rule maintains, eligible uses that provide support for individuals who have experienced a negative economic impact from the COVID-19 public health emergency, including uses that provide job training for unemployed individuals. These initiatives also may support small business start-ups, microbusinesses, and individuals seeking to start small or microbusinesses.[3]

In addition, the Final Rule provides a broader set of enumerated eligible uses for disproportionately impacted small businesses and/or small businesses in disproportionately impacted business districts.

Recipients may use [CSLFRF] funds to assist these businesses with certain capital investments, such as rehabilitation of commercial properties, storefront improvements, and façade improvements. Recipients may also provide disproportionately impacted microbusinesses additional support to operate the business, including financial, childcare, and transportation supports.

Recipients could also provide technical assistance, business incubators, and grants for start-ups or expansion costs for disproportionately impacted small businesses. Note that some of these types of assistance are similar to those eligible to respond to small businesses that experienced a negative economic impact (“impacted” small businesses). However, because the final rule presumes that some small businesses were disproportionately impacted, these enumerated eligible uses can be provided to those businesses without any specific assessment of whether they individually experienced negative economic impacts or disproportionate impacts due to the pandemic.[4]

In designating a negative economic impact, recipients must identify an economic harm caused or exacerbated by the pandemic on a small business or class of small businesses to provide services that respond. The Final Rule further describes such a consideration as follows:

programs or services in this category must respond to a harm experienced by a small business or class of small businesses as a result of the public health emergency. To identify impacted small businesses and necessary response measures, recipients may consider impacts such as lost revenue or increased costs, challenges covering payroll, rent or mortgage, or other operating costs, the capacity of a small business to weather financial hardships, and general financial insecurity resulting from the public health emergency. Recognizing the difficulties faced by small businesses in certain communities, the final rule presumes that small businesses operating in QCTs, small businesses operated by Tribal governments or on Tribal Lands, and small businesses operating in the U.S. territories were disproportionately impacted by the pandemic.[5]

Recipients or subrecipients of CSLFRF assistance cannot anticipate every potential issue that might arise while using these funds. Therefore, municipalities may wish to involve counsel to ensure compliance with federal, state, and local laws.

In addition, section 3301 of the ARP provides $10 billion to state and Tribal governments to fund the State Small Business Credit Initiative (“SSBCI”).[6] This allocation will expand the scale of the previously-authorized SSBCI to include:

• $500 million to support very small businesses with fewer than ten employees;
• $1.5 billion for states to support businesses owned by socially and economically disadvantaged people;
• $1 billion for an incentive program to boost funding tranches for states that show robust support for businesses owned by socially and economically disadvantaged individuals; and
• $500 million for technical assistance.[7]

As a final point, the Small Business Administration (“SBA”) website includes resources related to COVID-19 relief funded under ARP and other federal programs that may provide insight on additional ways municipalities can assist small businesses.[8]

Last Updated: February 1, 2022