Introduction
Since the 1970s, revolving loan funds (RLFs) have been a critical tool in the economic development of rural America. RLFs provide essential financing to rural small businesses and stimulate commercial bank lending. RLFs have had an excellent track record that has led to the creation of thousands around the country.

The US Forest Service funded a limited study conducted by the National Association of Development Organizations (NADO) Research Foundation to review the work of RLFs that serve rural areas whose economies are natural resource-based. This report provides a summary of the NADO Research Foundation's findings. It shows that although historically some of the poorest parts of the US, an increasing number of rural natural resource-dependent areas are experiencing an economic renaissance thanks in no small part to RLFs that are financing value-added natural resource-based businesses. NADO Research Foundation concludes that calling for a need to build the capacity of newly and soon-to-be established RLFs is a sound future management strategy for the Forest Service. Effective and efficient use of RLF funds will ultimately strengthen rural economies and protect the natural environment by creating local businesses dependent on sustainable and high quality products from the land and water.

Origins of RLFs
It is ironic that although much of economic development depends on a healthy small business sector, these types of businesses have historically had few options for start-up or expansion finance. Up until about twenty years ago, the only alternatives open to them were applying for a commercial bank loan or using personal savings. Since the 1970s, however, more and more financing options have become available to entrepreneurs, including credit cards, home equity loans, and investment firms.

Bank lenders have also improved their lending to small businesses, but usually through outside stimulation. For example, federally guaranteed loan programs run by such agencies as the Small Business Administration (SBA) and the US Department of Agriculture (USDA) have reduced the risk inherent in lending to small businesses.

Despite these advances in the availability of capital, there still remains a credit gap, especially in rural America. Commercial bank credit for small business development is difficult to come by in rural areas due to the scarcity of financial resources and conservative lending practices. Regulated financial institutions consider small business loans, which are often less than $100,000, to be too small and cost-ineffective to finance. Also, in cases where a large regional or urban bank dominates the local financial market (which is increasingly the case in view of the recent wave of bank mergers and acquisitions), lending decisions are not necessarily made locally and thus may not favor rural credit demands.

RLFs have helped fill this credit gap for over two decades. First initiated at the national level, the USDA, SBA, US Department of Commerce's Economic Development Administration (EDA), US Department of Health and Human Services (HSS), and the US Department of Housing and Urban Development (HUD) have funded RLFs at the regional and local levels to provide loans to small businesses that otherwise are unable to obtain commercial loans. These federally funded RLFs, run by both governmental and non-governmental entities, have inspired state and local government, private, and philanthropic funding of RLFs to the point that today there are thousands of RLFs across the country serving both rural and urban areas.

The Impact of RLFs
RLFs are independent and unregulated financial institutions whose capital base is replenished by principal repayments and interest income and is then loaned out again. Though unregulated, RLFs have maintained an excellent track record of relatively low loan defaults by employing loan application review processes and loan servicing techniques used by commercial banks. RLFs sometimes are the sole lender to an entrepreneur for smaller loans, but usually the RLF participates in a loan deal with a commercial lender. In these cases, the bank would not have made a loan without the participation of the RLF, which often assumes a subordinated role, giving the bank first option on collateral in case of default. In this way, limited RLF funds have leveraged up to six times the RLF's participation in a deal.

Evaluations show that RLFs successfully serve the credit needs of small business borrowers that are not otherwise eligible for commercial credit. Fixed-rate financing, long-term loans for fixed asset acquisitions, subordinated collateral positions, longer-term working capital debt, and microenterprise loans are niches filled by RLFs.

Perhaps the most important impact of RLFs has been on job creation. A report by the Corporation for Enterprise Development (CfED) found that each of the 356 RLFs for which it had data has created or retained, on average, 568 jobs, which can be significant in a rural economy.

US Forest Service RLF Project
Some of America's poorest rural areas are dependent on natural resources for their economic survival. These areas' economies remained underdeveloped largely because of the low price for primary products produced by businesses. In these areas, raw products are exported out of the region to be processed into higher value products. Recently, though, a growing number of entrepreneurs have seen the potential of the primary products around them and are turning them into value-added products and then shipping them out of the region, thus bringing in more income to the local and regional economy. RLFs have played an important role in the financing of such ventures. In recognition of this trend, the Forest Service funded NADO Research Foundation to study how RLFs are assisting value-added natural resource-based businesses.

To collect data, NADO Research Foundation issued a national call to newly formed RLFs (established since 1993) to supply information about their lending activities. The call was disseminated through the following channels:

• the NADO Research Foundation's Economic Development Digest, which is sent to more than 8,300 rural economic development professionals;
• the Development Finance Reporter, the monthly newsletter of the NADO Research Foundation's Economic Development Finance Service (EDFS), reaching some 100 RLF professionals;
• NADO News, NADO's weekly newsletter for members that is sent to over 400 regional economic development professionals;
• a special targeted mailing was sent to over 1,000 Forest Service professionals and state foresters and their staff;
• National Association of Resource Conservation and Development (RC&D) Councils; and
• NADO's Web site, which included a freely downloadable application form.

Alaska
City of Wrangell
PO Box 531
Wrangell, AK 99929
Contact: Carol Rushmore, Economic Director
tel.--907-874-2381

Southeast Alaska RLF
Juneau Economic Development Council
612 West Willoughby Ave., Suite A
Juneau, AK 99801
Contact: Gary Parr, Director
tel.--907-463-3662

Arizona
Northern Arizona Council of Governments
119 East Aspen
Flagstaff, AZ 86001
Contact: Ken Sweet, Executive Director
tel.--520-774-1895

California
Sierra Planning and Economic Development District
560 Wall St., #F
Auburn, CA 95603
Contact: Betty Riley, Executive Director
tel.--530-823-4703

Colorado
Town of Walden
PO Box 489
Walden, CO 80480
Contact: Bruce Wilson, Director, Walden Development Office
tel.--970-723-4344

Iowa
Sioux Rivers RC&D Area
315 10th St.
Onawa, IA 51040
Contact: Darrell Geib, Acting Coordinator
tel.--712-276-4648

Southern Iowa RC&D Area
500 East Taylor St.
Creston, IA 50801
Contact: Dennis Hilger, Coordinator
tel.--515-782-7058

Kentucky
Northern Kentucky Area Development District
PO Box 668, 16 Spiral Dr.
Florence, KY 41022-0668
Contact: Jay Treft, Management Services Specialist
tel.--606-283-1885

Maine
Growth Council of Oxford Hills
166 Main St.
Paris, ME 04281
Contact: Brett Doney, CEO
tel.--207-743-8830

Kennebec Valley Council of Governments
17 Main St.
Fairfield, ME 04937
Contact: Dana Sumner, RLF Manager
tel.--207-453-4258

Montana
Beartooth RC&D
PO Box Drawer D
Joliet, MT 59041
Contact: James Klessens
tel.--406-962-3914

New York
Catskill Watershed Corporation
PO Box 569
Margaretville, NY 12455
Contact: A. Reese Peck, Executive Director
tel.--914-586-1400

Oklahoma
Cherokee Hills RC&D
1020 South Muskogee Ave.
Tahlequah, OK 74464-4734
Contact: Barry Bolles
tel.--918-456-8211

Examples of Natural Resource-Based Loans
RLFs lend to a wide range of natural resource-based businesses, as evidenced by the variety of examples provided by the participants of this study. What follows is a cross section of these projects.

Project: Glacier Garden Rainforest Adventures
RLF: Juneau Economic Development Council, Juneau, AK

Glacier Garden Rainforest Adventures is located in Juneau near the Mendenhall Glacier in the TONGASS National Forest and is co-located on private land and US Forest Service land. The facility gives tourists and local residents an opportunity to observe the rain forest environment from the comfort of a covered golf-style cart complete with a tour guide/naturalist familiar with all the flora and fauna of the area. The facility is designed to give the tourist a bird's eye view of the natural forest while providing maximum protection to the surrounding environment. The facility has been in the planning and development stage since 1993 and opened June 1, 1998.

The loan for $300,000 was used for the construction of a green house and site preparation including landscaping and construction of cart pathways. Private and commercial financing of approximately one dollar for every two RLF dollars was obtained by the borrower in addition to the existing business equity. The new business created four full-time and 23 part-time jobs in 1998, and between 1999 and 2001 about 63 new jobs are expected to be created. For a comparison, this tourist attraction may be compared to Buchart Gardens in British Columbia, Canada which has a little over one million visitors a year. Juneau has over 650,000 visitors of which 100,000 are expected to visit the new attraction in 1998.

The RLF made a $880,808 loan for the construction of a secondary wood re-manufacturing plant to supply instrument wood in the form of guitar tops, piano sound boards, harp sound boards, and other secondary products. The business initially employed sixteen full-time employees and is expected to grow to 30 employees after three years.

The business was started in 1992 by a Japanese firm to initially produce wood stove pellets, cat litter, and eventually, develop a pellet space heater. The Japanese parent company lost interest in the plan for a variety of reasons. Robert Davis, the Plant Manager since the beginning, purchased FEC in 1997. He has since been building the business and has added cat litter to his product mix. The RLF made a loan of $250,000 for working capital to support marketing efforts. This loan has resulted in the retention of 16 jobs and the creation of three more. One major source of the wood fiber raw material is Fort Apache Timber Co., which is a tribal enterprise corporation of the White Mountain Apache Tribe. A secondary supply of wood chips is the Stone Container Eager Lumber Mill, which has undergone severe downsizing due to the Spotted Owl problem.

The Walden RLF Program made a loan to Black Dog Forestry, LLC, a start-up logging firm providing post and poles, small house logs, and other wood specialty products to a number of customers, including ranches, fence building contractors, and furniture makers. The majority of forest product sales are outside of the county, bringing in new dollars. The company received $65,000 from the RLF which was leveraged with $40,000 in owner's equity. The project has created four full-time jobs.

In May 1997, the RLF made a $10,000 working capital loan to this family-owned sawmill equipment manufacturing company in Waterford, ME. They also closed an additional $27,000 in financing for new marketing materials for the company and $65,000 to purchase equipment. Sanborn Machine manufactures custom sawmill equipment sold around the world, as well as mini-mills for small wood products businesses. The company has 34 employees.

In mid-1998, an Austrian company bought 40 percent of Sanborn Machine and made an equity investment of $600,000. It will market Sanborn in Europe and Asia, a result of which sales are expected to double in the next two years and an additional 30 jobs could be created.

Luther Hughs is a Native American craftsman who utilizes natural resources to create Native American arts and crafts. Most of his work is done with wood, animals skin, and feathers. He has made ceremonial masks and other articles that have been sold and shipped all over the world. Luther and his wife operate a small shop in Tahlequah, which is the capital of the Cherokee Nation. The RLF made a $15,000 loan for operating capital, which has resulted in the creation of two full-time jobs and one part-time job.

This study was the first step in documenting the scope of RLF lending to natural resource-based businesses. Based on the findings of this study, NADO Research Foundation submits the following recommendations to the Forest Service for consideration:

• Further research is needed to expand NADO Research Foundation's database of RLFs that undertake natural resource-based lending and the types of enterprises they finance. A database and network of such RLFs and businesses could be used for information sharing, and thereby encourage RLFs that do not currently make such loans to target natural resource-based businesses in future.

• More capacity building and training of RLF staff is needed to strengthen the efficiency and effectiveness of RLF management and lending. Federal sources of RLF capitalization and recapitalization funds are limited, and RLFs cannot afford to make poor lending decisions. RLF training, such as that offered by NADO Research Foundation's EDFS, is one way of building capacity.

• Increase efforts to establish working partnerships among federal agencies at the national level that fund RLFs.

• Encourage existing public and nonprofit organizations at local and regional levels to create partnerships that provide a continuum of financing and technical assistance.