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"It will be small businesses and start-ups that lead us out of the economic problems in the state," state Sen. Doug Overbey told Areawide Development Corporation members at their annual meeting Tuesday at Egwani Farms Golf Course, Rockford.

To that end, the Maryville lawmaker described legislation to raise private funds for small businesses and start-ups, which was enacted by the Tennessee Legislature June 18, on the last day of the legislative session. He and state Rep. Charles Sargent of Williamson County originally filed the Tennessee Small Business Investment Company Credit Act last January.

The act enables the state to sell $120 million in future tax credits to insurance companies in exchange for their investing money in six venture capital funds, called "TNInvestcos." These, in turn, will invest in small businesses.

The legislation was patterned after similar legislation in other states.¬

"Some have been successful, some have not been successful," Overbey said. "We tried to take the best parts of seven or eight bills from other states and combine them."

The beauty of Tennessee's approach is that funds will be obtained for investment during the first year of the program, he said, while the participating insurance companies will get tax credits of 10 to 15 percent in each of the third through 10th years of the program.

State could profit

Insurance companies are looking for places to invest, and this is a way to encourage them to invest in Tennessee small businesses and start-ups, Overbey said.

He added when a small business invested in by a TNInvestco is sold or goes public, the state will receive 50 percent of the profit from the transaction. That is higher than in other states, which stand to gain 10 to 20 percent from venture capital funds they've created.

"If this works the way we think it will work, once the general fund is paid back, profits will go into the state's Rural Development Fund," for further economic development efforts, he said.

Overbey added that he's heard that venture capital firms may be interested in leveraging the TNInvestco funds, which could result in four to five times the amount being made available to Tennessee small businesses. He added that a prominent venture capital trade magazine has called this model legislation, which could be adopted across the country.

Areawide Development Corporation, located in Alcoa, markets and processes U.S. Small Business Administration Section 504 loans and similar loans from federal and state loan programs to small businesses in partnership with banks to help finance capital projects.

Overbey noted the TNInvestcos would be another tool that economic development entities could use to help grow the state's economy.

Number of loans down

Don Woods, Areawide's director, noted that the number of SBA section 504 loans made during the 2009 fiscal year are down due to the slumping economy.

Areawide made six such loans, totaling $7,020,000 in loan volume for the year, which is down from 11 loans, totaling $8,765,000, for 2008. Although smaller in number, he noted the loans made were for larger amounts, averaging $1,070,000 for 2009, up from $796,000 for 2008.

He added loan rates are currently very favorable.

Terry Bobrowski, Areawide's executive vice president, and East Tennessee Development District's executive director, added that Areawide also has $165,000 available to lend from the Small and Minority-Owned Businesses loan program, which is also funded through the state and was initiated within the last 18 months to two years. The loan program targets very small businesses and those with minority ownership or that are in rural areas.

"If you have leads, let us know," he told the corporation membership.

Bobrowki noted the SMOB program makes loans up to $125,000, but those made thus far have averaged around $70,000. Areawide has funded eight SMOB loans thus far, with a total loan volume of $450,000, and has another in the works for $53,000.

"We're going through a tough time right now," Bobrowski said, "but I think small business will be one of the leaders to get us out of the economy we're in right now."