Loan Funds Key to
Regional Economic Strength

By William Amt, EDFS Manager, NADO Research Foundation

Over the past three decades, regional development organizations (RDOs) have made thousands of loans to new and expanding small businesses that have created and saved hundreds of thousands of vital jobs in rural and small metropolitan America. RDOs make loans to a wide range of firms in the manufacturing, service, and other sectors that are helping local economies survive the current downturn.

In addition to conducting entrepreneurship training, providing technical assistance, preparing development strategies for localities, and managing business incubators, administering loan funds is one of the principal economic development strategies employed by RDOs. Most of these funds are capitalized by federal programs.

The 2002 NADO Regional Development Organization Survey of NADO members showed that 55 percent manage the Economic Development Administration (EDA) Revolving Loan Fund (RLF) Program, and 36 percent manage the US Department of Agriculture’s Intermediary Relending Program (IRP). Regional organization RLFs are also financed by the Appalachian Regional Commission, Department of Housing and Urban Development’s Community Development Block Grant Program, and US Small Business Administration (see chart on page five). A 2002 survey of members of the NADO Research Foundation’s Economic Development Finance Service (EDFS), a national organization of loan fund professionals, found that RDOs and other member organizations manage a median of two funds, and that 24 percent manage four or more. The EDFS survey’s findings are summarized in the report Loan Funds Create Rural Jobs Efficiently.

Loan funds target so-called “high-risk” borrowers who are unable to obtain bank financing because they have a poor or nonexistent credit history, insufficient collateral, or are a start-up with no track record. By providing them financing, loan funds have been instrumental in the growth of companies that otherwise might not have received financing. As a testament to the indispensability of loan funds, an evaluation by Mt. Auburn Associates found that 25 percent of fund borrowers would have either gone out of business or not started their companies and another 51 percent said they would have canceled, delayed, or scaled back their investments in their companies.

RDO loan funds play a critical role in the economic development of distressed rural areas, where alternatives to conventional financing are limited. In inner cities, community development corporations (CDCs) and community development financial institutions (CDFIs) often manage loan funds; in rural areas, where there are fewer of these organizations, RDOs are often the only source of alternative financing for start-ups and existing businesses. The critical role played by public entities in bringing economic development capital to rural areas was illustrated in a 2002 survey conducted by EDFS and NADO members, most of whom serve rural and small metropolitan America. It revealed that almost half are the sole source of loan fund capital in all or part of their regions.

The 58 organizations that provided data for the EDFS survey have a demonstrated impact on the rural economy. Over 520 counties in 29 states are covered by the organizations, for a median service area of seven counties. The 167 funds they manage have a median age of seven years, but also include some of the first federally-funded loan funds in the country. Together, they have made over 6,600 loans that have created and saved more than 112,300 jobs. Individually, each organization makes a median of six loans per year and has created and saved a median of 932 jobs. This is significant in areas where the median population density is 68 people per square mile.

Economic Development Administration (EDA) RLFs have a greater job impact than the other loan funds in the EDFS study. Each of the 167 funds create and save a median of 33 jobs per year, while the RLFs have a median annual job impact rate of 48 jobs per year. IRPs in the study create and save a median of 40 jobs each year.

In addition to their impact, the funds are also managed well. Even though they make relatively risky loans, loan funds keep their delinquency, default, and write-off rates low by providing technical assistance throughout the life of the loan, and being more flexible than banks by devising strategies for problem borrowers that increase repayment rates and the chance of business success. For instance, among the 167 funds, 57 percent reported no defaults and over 50 percent noted they had not written off any loans over the life of the fund. The mainly public funds are also effective at attracting additional private sector dollars, leveraging a median of $3.50 for each fund dollar loaned.

Overall, loan funds’ cost-per-job rate is economical. The 167 funds in the EDFS study create and save one job for each $4,906 loaned. The EDA RLFs in the study are even more efficient, expending $3,650 per job.

RLF Impact in Pennsylvania

As illustrated in the chart of EDFS members with the highest job impact, Northwest Pennsylvania Regional Planning and Development Commission in Oil City, Pennsylvania, is an economic development engine. One of the most productive funds it manages is an EDA RLF which, since 1982, has created 2,738 jobs and saved and additional 5,017 in an area with 6.8 percent unemployment.

An example of a company assisted by the RLF is Seneca Printing, which printed the 2002 Economic Development Directory that Northwest Pennsylvania prepared for EDA. The company received a $100,000 RLF loan in 1992 to purchase printing equipment. These funds leveraged $100,000 in private financing and helped the company grow from 33 to over 400 employees. Dennis Pascarella, CEO of Seneca Printing, said, “This loan has enabled us to become a thriving tenant in two of our county’s industrial parks, where we operate world-class modern facilities. We offer our employees a quality wage and fringe benefits, and in 2001, we were awarded a Best Workplace in America title from Printing Industries of America.”

For more information, contact: Daryl Coyne, Northwest Pennsylvania’s Finance Specialist, at 814/677-4800 or darylc@nwplan.org. For more information about EDFS, contact Bill Amt at 202/624-8467 or bamt@nado.org. Loan Funds Create Rural Jobs Efficiently: Findings of the 2002 EDFS Biennial Members Survey is available at www.nado.org/pubs for $15.

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