Counting on Local Capital

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Preliminary Findings

The Washington RLF ProfileConducted by

Corporation for Enterprise Development with funding from the Ford Foundation

and the Washington Department of Community Trade and Economic Development and The Washington Lenders

Network

Counting on Local Capital

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Project Overview Research and policy project to collect, analyze, and disseminate

information about revolving loan funds (RLFs).

Conducted by the Corporation for Enterprise Development (CFED), an organization which specializes in developing policies and programs to promote economic competitiveness and economic opportunity at the local, state, and national levels.

Implemented in two phases, with Phase I focused primarily at the federal level and Phase II at the state level.

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To develop individual state profiles of the RLF industries in up to five states, creating a model data collection and source of best practices for the RLF industry.

To assess the feasibility of statewide and/or regional RLF intermediaries which offer data collection, asset management, access to capital, and technical assistance services.

To communicate the knowledge and lessons learned through the project by convening national, regional, and electronic meetings of practitioners, funders, and policymakers.

Project Goals

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Washington RLF Profile

Washington selected as state partner in September 97 Sponsored by Washington Department of Community Trade and

Economic Development; The Lenders Network; and Cascadia Revolving Loan Fund

Steering Committee first convened September 1997 tailored survey to interests of practitioners and funders refined list of funds to survey

Survey mailed December 1997 -- last one returned May 4, 1998

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Methodology

Surveys were mailed to 53 potential economic development RLFs 41 RLFs returned surveys. (Several of these RLFs were managed

by the same organization)

12 reported that they did not have an economic development RLF,

or operating as part of another, larger fund .

Washington is the only state with 100% response rate

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The RLF Organizations

Organizational Structure25 Responding Organizations

15

3

7

0

2

4

6

8

10

12

14

16

No. of RLFs

0-5 6-10 More than 10

Years in Operation

Years in Operationfrom year of first loan

%Public Sector 17.4

Nonprofit 65.2

Quasi-public 13.0

Other 4.3

Total 100.0

Oldest RLF--17 years

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Yes85%

No15%

Made a loan in the last 6 months

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Washington 50%Single

50%Multiple

Federal Census63%

Single

37%Multiple

Operate Single or Multiple RLFs

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Washington’s RLF organizations are relatively small…. Exactly half are capitalized at less than a million dollars

67% (14 of 24 respondents) have an operating budget of less than $100,000

47% (17 of 36 respondents) are staffed at one full-time employee or less

But sophisticated Almost all services (loan packaging, underwriting, portfolio

management, liquidations) are provided in house by over 80% of the RLFs

59% use a spreadsheet software and all feel proficient in it

In addition, 33% use an RLF software and 38% use accounting software

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RLF Capital

RLFs reported total capital sources of $70 million

smallest fund has $10,000 largest fund has $20 million

The $70 million was provided by the following sourcesAmount %

Federal 31.0 44.0State 13.4 19.1Private 5.4 7.6Foundation 2.5 3.5Religious Organizations 1.5 2.1Program Income 2.9 4.1Local 0.6 0.9Other 3.0 4.2

“Unspecified”/”Not Separated” 10.2 14.5

TOTAL 70.0 100%

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Federal Funding Sources

USDA24%

Other6%

Forest16%

EDA21%

HUD33%

OtherDept. of Energy 1.5%

SBA 4.0%

HHS 0.1%

Other 0.3%

Total Federal Funding$31 Million

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Philanthropic Funding Sources

Foundations and Religious Organization

$4 million

Foundation62%

Religious38%

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Timing of Capitalization

16.4

0.8 1.2 1.7 1.9

11 11.2

15.1

11.7

02

468

101214

1618Millions

Before1990

1990 1991 1992 1993 1994 1995 1996 1997

$70 million

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Timing of Capitalization

RLF funding came almost entirely from the public sector until 1993

All foundation funding occurred in 1993 or later

All religious organization funding occurred in 1993 or later

All but 0.6% of private sector (banks, corporations, and other unspecified private groups) funding was in 1993 or later

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RLF Capital Structure

Total Capital Structure$70 million

Debt11%

Grants or Equity

89%

Sources of Debt Capital$7.8 million

Banks and Bank

Consortium0.03%

SBA18%

USDA80%

Other2%

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RLF Capital Structure

Most Washington RLFs do not have a diverse funding base

43% (of 35) RLFs received funding from only 1 source

Another 22% received funding from only 2 sources

Several funders are being accessed by few RLFs; only

three RLFs received money from: the SBA, the US Forest Service, religious organizations

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RLF Loan Terms

First loan to RLF made in 1982

69% of debt financing invested since 1995; 51% in 1996 alone (IRP)

Interest rates range from 0% to 2.5%

Loan terms range from 1 to 40 years

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RLF Products

Average loan size was $10,163

40% had a minimum loan size of less than $1,000

83% offered fixed interest rates

Interest offered varied from 0 to 12.7%

45% had loan terms of 3 years or less; 30% terms of five years or more

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RLF Services

Services currently offered (percent of RLFs): One-on-one assistance -- 81% Formal technical assistance -- 35% Mentoring -- 22% Provided no services -- 8%

Additional services customers requested: Line of credit -- 69% Venture capital -- 59% Marketing -- 9%

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Communities Targeted

66% RLFs (21 of 32 who responded) target low - to moderate income people 86% of those funds providing detailed data (18 RLFs) made

over 25% of their loans to low-mod income people

59% RLFs (19 of 32) target minorities

Start-ups are being targeted as much as existing companies (31 vs. 33 respondent RLFs)

Manufacturing is predominant industry type (23 RLFs have made loans), closely followed by retail (20 RLFs) and services (19 RLFs) and fewer timber (6) and salmon (3)

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RLF Portfolio Data

RLFs asked to report the following portfolio data Current capitalization levels

Amount of loan loss reserves (if any)

Value and number of outstanding loans

Average loan size

Cumulative value and number of RLF loans

Capital available for lending

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RLF Portfolio Data

RLFs asked to report the following performance data

Amount and value of delinquent and defaulted loans

Amount of loan losses

Definitions of delinquency and default

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RLF Portfolio Data

Performance data reported varied widely in quality and consistency

RLF Capitalization levels rarely matched total capitalization sources reported earlier in survey

However, data on outstanding loans, average loan size, and delinquency was generally strong

41% of the RLFs reported Loan Loss Reserves totaling $664,000--equal to 1.3% of total capitalization (compared to 19% of California RLFs with reserves of 0.4%)

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Current and Cumulative Lending Activity

Current Loans(Outstanding)

CumulativeLoans

Number of RLFs Reporting 34 36

Total Loan Capitalization (inmillions)

$50.0 N/A

Loan Dollars (in millions) $31.3 $58.0

Number of Loans 480 1,034

Average Capitalization per RLF $1,529,953 N/A

Average outstanding Loan Dollarsper RLF

$934,347 $1,610,203

Average Number of Loans per RLF 14 29

Average Loan Size $66,182 $56,061

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RLF Portfolio Data

Capital Available For Lending

Number of RLFs reporting 35

Total capital available $23,459,789

Average capital available $670,280

Demand for Additional Capital

Number of RLFs reporting 35

Number seeking additional capital 20 (57%)

Capital needs identified $20,000,000

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RLFs and the Secondary Market

Number of RLFs% of

Responses

Sold loans on secondary market 0

Interest in selling loans in the future 7 19%

RLFs indicating need for capital andinterest in loan sales

0

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Barriers to the Secondary Market

NumberResponding

Percent Responding

Loan Pricing Policies 10 39%

Discount Rates 7 27

Regulatory restrictions 5 19

Recourse Requirements 5 19

Delinquencies and Default Rates 4 15

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Defining Delinquency

33 RLFs provided definitions for delinquency

1 as past due 15 days 31 as past due 30 days 1 as past due 60 days

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Delinquent Loans

30 RLFs collectively reported 70 delinquent loans; values were reported for 53 of these loans & totaled $894,637

13

6

32

1 1 1 1 1 1

0

2

4

6

8

10

12

14# of RLFs

0 1 2 3 4 5 6 9 12 16

Loans Delinquent

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Delinquency Rates

13 RLFs reported values for both delinquencies >0 and loans outstanding

$ 894,637

$14,102 068

28 RLFs reported values for both delinquencies >= 0 and loans outstanding

$ 894,637

$28, 593,239

6.34%

3.13%

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Defining Default

35 RLFs provided definitions of default

1 had no definition yet

1 payments past due 60 days




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Default Data31 RLFs collectively reported 54 loans in default;

Values were reported for 49 of these loans totaling $1,459,428

17

54

0

3

0 0 0 0 0 0 0 01 1

0

2

4

6

8

10

12

14

16

18

# of RLFs

0 1 2 3 4 5 6 7 8 9 10 11 12 13 16

Number of defaulted loans

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13 RLFs reported values for both defaults >0 and loans outstanding

$ 1,535,156

19,722,285

30 RLFs reported values for both defaults >= 0 and loans outstanding

$ 1,535,156

31,944,401

Default Ratios

= 7.8%

= 4.8%

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Job Creation

Total jobs created 6,432

# of RLFs that reported using Job Creation asa measure of impact

33 87%

# of RLFs that reported a Job Creation figure 25 78%of users

Average jobs created per RLF 257

Median jobs created per RLF 60

Maximum jobs created per RLF 2,875

Average dollars loaned per job created $12,411

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Jobs Retained

Total jobs retained 2,928

# of RLFs that reported using Job Retention asa measure of impact

30 64%

# of RLFs that reported a Job Retention figure 24 45%

Average jobs retained per RLF 122

Median jobs retained per RLF 40

Maximum jobs retained per RLF 975

Average dollars loaned per job retained $20,004

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Preliminary Capitalization Findings

29 organizations -- managing 41 funds -- reported $70 million in capital, with 64% provided by federal, state and local sources, while 11.1% came from private sources.

Most capital was from public sources before 1993

$26.8 million was invested in 1996 and 1997, indicating recent dramatic growth in the field.

Most RLFs are small, with operating budgets under $100,000, and capitalization of less than $1 million

Most RLFs have undiversified sources of funding

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Preliminary Recapitalization Findings

RLFs identified a need for an additional $20 million in capital, matching almost exactly the $23.4 million in total available capital or reserves reported.

No RLFs have sold loans on the secondary market, but 19% expressed an interest in doing so. Loan pricing policies and discount rates were identified as the key barriers to loan sales.

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Preliminary Impact Findings

87% of RLFs reported using job creation as a measure of impact and 64% use job retention.

25 RLFs reported creating 6,432 jobs, an average of 257 jobs per RLF at an average cost of $12,411 per job.

24 RLFs reported retaining 2,928 jobs, an average of 122 jobs per RLF at an average cost of $20,004.

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Preliminary Findings on Lending Activity

41 RLFs reported cumulative lending of $60 million, at an average of $1.6 million loans outstanding per RLF

The average loan size equaled $66,182 for current loans and $56,061 for cumulative loans.

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RECOMMENDATIONS

Funders need to provide money for operating support, equity and liquidity, particularly for the younger RLFs that do not yet have much income from loan repayments at a time when their training and support needs are greatest.

An intermediary institution, such as the Washington Lenders Network, should provide targeted training and assistance to RLFs across the state. A large portion of RLFs are young and inexperienced and do not have access to nearby specialized training, or other needed support service.

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RECOMMENDATIONS

Some institution, such as the Washington Lenders Network or a regional intermediary, must collect data for Best Practices and advocacy to legislators, funders and citizens. Best practice information and data detailing impact and need should be made available on a regular basis.

Programs or institutions are needed that can pool the costs for expensive operating services such as bonding requirements, auditors experienced with development finance institutions, Director and organizational liability insurance, employee benefit plans and specialized document production.

Counting on Local Capital

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