EDA RLFs: Change Agents in Distressed Communities

By William Amt, NADO Research Foundation Program Manager, EDFS

Economic development loan funds have a three-decade track record of growing small businesses and creating jobs in distressed communities across the country. As evidence of their performance and impact, a recent evaluation commissioned by the Economic Development Administration (EDA) concludes that EDA’s revolving loan fund (RLF) program is “a highly efficient vehicle to revive local economies hit by long-term or sudden negative economic change.”

The four-volume report, EDA RLFs: Planning, Local Structural Change, and Overall Performance, published in 2002 by a research team led by Rutgers University, includes findings of research that examined 450 grantees between 1976, when the program was implemented, and 1998. During this period, RLFs made 11,600 business loans totaling over $670 million. These loans were instrumental in creating and saving over 280,000 jobs.

Loan funds make available capital to qualified borrowers who are unable to obtain bank financing on their own because they are start-ups or lack sufficient capital. These investments are targeted in areas experiencing long-term economic deterioration, sudden and severe economic dislocation due to disasters, or adverse effects due to a reduction in defense spending. The businesses that have received EDA financing have created needed jobs and contributed to the tax base in communities that need it most.

The Rutgers report examines the effect of planning on fund performance, the impact of loans on economic restructuring, and overall performance. Having a comprehensive economic development strategy (CEDS) and RLF plan linked to the CEDS results in increased loan fund performance. RLF loans have a positive effect on economic structural change, which is calculated by examining the influence of EDA lending on counties’ economic diversification, earnings per worker, movement toward more skilled industries, and level of import dependence. Overall performance results are listed in the box at the bottom of page seven. To underscore the impressive performance of loan funds, the report says that the default/write-off rate of 8.6 percent is “quite remarkable” when compared to prime commercial real estate loans in default (three percent), given the higher risk of the loans.

Another report, EDA RLFs Make a Difference: How the Economic Development Administration’s Revolving Loan Fund Program Promotes Business Development and Job Creation, published in September 2002 by the National Association of Development Organizations (NADO) Research Foundation’s Economic Development Finance Service (EDFS), adds to the literature about EDA RLFs. The report cites data from several EDA-commissioned evaluations, including Rutgers’, and includes 16 case studies to illustrate the program’s performance and impact at the national and local levels (see boxes on pages six and seven). For example, a 1987 study by Mt. Auburn Associates found that if not for EDA financing, 51 percent of 729 borrowers said they would have cancelled, delayed, or scaled back their investments in their companies and 25 percent would have either gone out of business or not started their companies. The EDFS study also makes recommendations for strengthening the program.

The Rutgers evaluation is available online at www.osec.doc.gov/eda/html/1g3_researchrpts.htm. The EDFS report can be downloaded from the NADO Web site at www.nado.org/pubs/rlf02.pdf.

Loan Fund Supports Innovative Economic Development

A new industry is taking shape in north central Pennsylvania, and one of its key sources of finance has been the RLF at the North Central Pennsylvania Regional Planning and Development Commission in Ridgway. The region is home to a burgeoning powdered metallurgy sector of metal parts producers and related industries. This method of producing metal products - from ball bearings to automobile parts - is replacing traditional welded or forged parts.

Patricia Brennen, the region’s loan program director, noted that of the 110 loans made by their RLF since 1984, 32 have been to businesses in this sector. Over 60 percent of the 704 jobs created by the fund have been by powdered metallurgy businesses, even though 30 percent of the fund’s loans have been to these businesses. Not only do they create more jobs than other businesses in North Central’s portfolio, but they have a greater profit margin, with an average increase in sales and net income of 15-23 percent.

Gasbarre Products is testimony to the impact of the loan fund. Gasbarre, which manufactures ceramic and metal powder compaction presses and sintering furnaces, has received financing from North Central five times for expansion in the past 12 years. According to Thomas Gasbarre, the company’s Chief Executive, “At the time of our first expansion, we had 55 employees; we now have 293, and couldn’t have achieved this without the help from North Central Pennsylvania’s investments.”

For more information, contact: Patricia Brennen at 814/773-3162 or pbrennen@ncentral.com.

International Scientific Company Lifts Local Economy

According to Stan Frisbee, Business Loan Specialist of the Meramec Regional Planning Commission in St. James, Brewer Science in Rolla, Missouri has grown to become a worldwide supplier of specialty chemicals, materials, and equipment to micro-electronics and opto-electronics manufacturers. In 1995, Meramec supported Brewer Science’s expansion by making a working capital loan of $150,000, which in turn leveraged $1.343 million in private sector funds for a loan-to-leverage ratio of $1: $8.95. The 16 jobs created in this town of 16,000 pay an average of $23 per hour, much higher than the regional average of $14. Since 1992, Meramec has made 37 loans that have created and saved 758 jobs.

For more information, contact: Stan Frisbee at 573/265-2993 or sfrisbee@meramecregion.org.

Rutgers Findings

Number of EDA RLFs evaluated - 422

Number of loans made by these RLFs 1975-1998 - 11,600

Total amount of dollars loaned by RLFs 1975-1998 - more than $670 million

Number of jobs created or saved by these loans - more than 280,000

Number of jobs created or saved by the median loan - 8

Number of jobs directly or indirectly attributable to RLF loans in the average county - 420

Private, public, and equity funds leveraged by one RLF dollar - $5.35 (private portion is $3.71)

Mean default/write-off rate - 8.6 percent

November 2002 Index | Next Page | Previous Page