What Happens When State-Funded Businesses Fail?

By Gregory B. Hladky

4:20 PM EDT, April 30, 2013


For one reason or another, they were all failures: a recycling outfit in Killingworth; a Greenwich consulting firm; a personal information security company in Berlin; and a West Hartford restaurant. Their closings cost Connecticut at least 28 jobs.

None of that's really surprising in a tough business climate like ours. What might raise some eyebrows is that those commercial flops could end up costing state taxpayers more than half a million dollars.

Gov. Dannel Malloy's administration provided those four small businesses with a total of $350,000 in low-interest loans and $177,500 in grants. Getting any of that money back from bankrupt or shuttered companies could be very tough.

State officials point out that Malloy's "Small Business Express" program has helped something like 600 different companies and mom-and-pop operations and created or saved more than 6,000 jobs.

"And we have almost a 94 percent success rate," says Ron Angelo, deputy commissioner with the state Department of Economic and Community Development.

The problem is that the entire effort was a response to Connecticut's shaky economy in the wake of the Great Recession, and the fact that commercial banks were doing squat as far as providing financing for small business ventures.

And make no mistake: Connecticut's ongoing job creation problems continue to put heavy pressure on a governor who's looking for reelection next year. Recent labor statistics show this state's employment recovery lagging behind the nation as a whole.

Our state unemployment rate is still at 8 percent. State officials say Connecticut has recovered only 51,200 (just 42.2 percent) of the jobs we lost during the recession.

All of which helps explain why the state is so ready to take a chance on providing money on small businesses that banks have turned away. The legislature approved more than $100 million for the program.

"The Small Business Express program is giving businesses on Main Street exactly what they need — the chance to grow," Malloy proclaimed at one announcement of another round of the state loans and grants.

The money has gone for almost every sort of commercial venture under the sun: casket companies; a Hartford gay bar; cheese makers; tool manufacturers; hair salons; computer tech shops; day care; architects; massage therapy; a distillery; aerospace and aircraft firms; and plenty of restaurants.

Unfortunately, when this type of state financial aid doesn't work, it can be real difficult to recover any of the taxpayers' money.

"You could say there's a higher level of risk associated with these deals," acknowledges Angelo. At the same time, he and other officials insist the agency aims to provide financing only to operations that have a real chance of success.

"We do a lot of due diligence and work closely with companies to develop good business plans," he says. But those plans don't always pan out.

APC Recycling in Killingworth got a $100,000 low-interest loan and a $100,000 grant from the state. It's now out of business.

Mandragore LLC of Greenwich copped a $250,000 loan, and is also kaput.

So is Serenity Shield Inc. ($30,000 grant) of Berlin; and Thirty5 Bar & Grille in West Hartford ($47,500 grant.)

The state's grant to that West Hartford operation drew snickers right from the start, with some people wondering why the state needed to finance yet another eatery in restaurant-rich West Hartford Center.

Thirty5 Bar & Grill was an expanded version of a local favorite that used to be known as Reuben's Deli. It got the state grant by promising to invest an additional $180,000 in new equipment, retain six jobs and create five new ones. The new state-financed restaurant opened on Oct. 8, 2012 and closed six months later.

The state, says DECD spokesman Jim Watson, "will be pursuing any available remedies" to recover at least some of that cash from all the operations that failed.

Angelo says all the loans and grants provided under the program include contracts spelling out what rights the state has in case a company doesn't meet its job creation or retention promises, or goes under.

He says that, in cases where loans have some collateral behind them, such as equipment or other property, it's not as difficult to recover some of the money. If a business or individual declares bankruptcy, the state can try to get something through the courts.

Grants are a hell of a lot tougher — if not impossible — to get back in the worst case scenario of a business failure.

"Yes," Angelo says with masterly understatement. "It is more difficult."



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