Interest rates and access to conventional bank financing find themselves at a favorable intersection in today’s economy. As a small business or new business startup, however, access to capital and favorable rates can be challenging. Every business has different needs, and no financial solution is one size fits all. There are many financial choices a small business or startup needs to consider when looking at funding operations and how to structure and run an operation. From determining how much funding is needed to support business activities to committing higher levels of personal investments or business funds as equity, structuring a complete financing package can often be difficult.
Local Revolving Loan Fund programs (RLFs) can play a dynamic role in supporting small business financing needs, especially serving in the gap financing or equity gap aspects of an overall lending structure. The structural benefit of Revolving Loan Funds is the creation of a self-replenishing pot of money for use on future mission-driven small business, entrepreneurial and economic development priorities. More importantly, billions in federal stimulus funding can support the development of RLFs through state and federal grants of Community Development Block Grant, U.S. Department of Agriculture and other programs.
The ability for an economic development organization to offer programs that can foster and support small business successes is important, especially since many of the traditional economic development tools in the toolbox are limited in how they can assist small businesses and startups. When looking at what programs your EDO has in place, or may look to put in place, it is important to keep these programs flexible and to build expertise around the programs that offer an integrated support system where small businesses can not only survive, but thrive.
There are many ways to go about structuring an RLF program and how an RLF program is structured should be a reflection of a community’s economic base and business needs. Ideas on local RLF programmatic uses could include any combination of:
- Gap Financing – to button up any final gap that exists in a financial structure
- Micro Loans – for new and emerging businesses that have 5 or fewer employees; micro loans are often smaller in scale (between $1,000 – $10,000)
- Credit Building Lending – to help entrepreneurs or credit-deficient owners build credit and the ability to access conventional financing
- Loan Guarantees – to back conventional lender financing and reduce lender risk
Thinking through the critical financial needs of the applicant businesses will also help you tailor your program to meet local needs. For example, working capital is essential to any small business, as building and maintaining adequate liquidity is the lifeblood to survival. Consider how your programs are designed to offer working capital to meet these liquidity needs.
Steps to set up a successful RLF program vary by community. Identifying seed funding for an RLF is one aspect to consider. Are local banks, community foundations, or public funding programs such as Community Development Block Grant options? Could your EDO dedicate a certain portion of its funding or program revenues towards a seed fund? Developing guidelines and forming a board are critical and looking to your community financial experts is key to getting the right expertise engaged and to ensure the long-term success of the program. Marketing the program to community and lending stakeholders is also critical. Any way your organization can expand your bandwidth with messaging will only help spread the word further than your limited staff has the time to do effectively.
Economic Development practitioners wear many hats and are charged with providing valuable resources to businesses of all shapes and sizes. Those looking for creative ways to support entrepreneurs and small businesses should consider establishing a flexible Revolving Loan Fund program.
The Montrose team would enjoy the opportunity to learn more about your plans and needs for developing and operating revolving loans funds. Please contact Dave Robinson at [email protected] or Jamie Beier Grant at [email protected] and we can help shape your next program that supports your economic development efforts.