RLFs Stimulate Economic
Growth, Jobs and Income

One of the key priorities of the Economic Development Administration’s (EDA’s) revolving loan fund (RLF) program is to create and retain quality jobs in distressed parts of the United States. As one of the first federal loan fund programs, EDA’s RLF program has been instrumental in making business loans that have created and saved thousands of jobs over the past 25 years.

Funded through EDA’s Economic Adjustment program, more than 500 RLFs support areas that experience long-term economic deterioration, sudden and severe economic dislocation due to disasters, or adverse effects due to a significant reduction in defense spending in the area. RLFs are managed by EDA-designated economic development districts, community development corporations, private and public nonprofits, states, Indian tribes, US territories and local governments, and are usually one of several tools these entities use for promoting economic development.

The funds are termed “revolving” because their capital base, once it has been loaned, is replenished by principal repayments, interest income and fees, and is loaned again to new and existing businesses. To grow their funds beyond what is accrued through interest and fee income, RLFs can apply to EDA for recapitalization grants. If the funds need capital quickly, they can sell a portion of their loans through a securitization process and re-lend the sale proceeds.

RLFs cater to the capital needs of so-called “high risk” borrowers who traditionally have been unable to obtain bank loans on their own because they are start-ups or lack sufficient collateral. Banks are more apt to lend to such businesses when an RLF loans a portion of what the business needs and agrees to let the bank recoup its losses first from the business’ collateral in the event of default. RLF participation in loan deals has been instrumental in the growth of some well-known companies that otherwise might not have survived (see sidebar).

Impact data illustrate the effectiveness of the EDA program. A 1990 RLF analysis prepared by EDA’s Economic Adjustment Division, determined that since 1975, EDA RLF loans resulted in the creation of 75,183 jobs and the retention of 42,842 more at a cost of $3,198 per job, or 313 jobs for every $1.0 million RLFs invested. RLF investments, in turn leveraged 4.5 times more private investment. The November 1999 EDA Government Performance and Results Act (GPRA) Pilot II RLF Projects report, prepared by Rutgers University, found that 42 RLFs established in 1993 had a cost per job of $4,107 and a private-sector leverage ratio of 6.25 to 1.

More recently, the National Association of Development Organization (NADO) Research Foundation’s Economic Development Finance Service (EDFS) found in a 1998 survey of its members that 29 RLFs with a median age of nine years created and retained 16,716 jobs, for a median of 473 jobs per loan fund. These RLFs made 1,160 loans, with a median of 22 per fund, and had an average job creation and retention level of 14.4 jobs per loan. l

For more information: Contact Dave Witschi, Director of EDA’s Office of Economic Adjustment at 202-482-2659 or dwitschi@eda.doc.gov.

Sierra Nevada Brewing Tri-County Economic Development Commission An EDA RLF loan helped Sierra Nevada Brewing Company with its first expansion in 1988, eventually leading to the company becoming a top-10 brewer, growing from 25 to today's 270 jobs. According to Marc Nemanic, Executive Director of the Tri-County Economic Development Commission (EDC) in Chico, California, Sierra Nevada needed $1.7 million for the project, and the lead bank in the deal wanted Tri-County to participate and assume some of the risk of making the loan. Because Sierra Nevada is community-oriented, they appreciated the involvement of Tri-County, an EDA-funded district that serves the economic development needs of three counties in rural northern California. Since the Tri-County EDA RLF was established in 1990, it has made 100 loans totaling $3.789 million and created and saved 446 jobs. For more information, contact Marc Nemanic at 530/893-8732 or marc@tricountyedc.org.

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