EDC fund struggles to find takers

When Rhode Island secured a $13.1 million grant from the U.S. Treasury to lend to small businesses in 2011, finding Ocean State companies to take the money didn’t register as a concern.
It’s become one at the Small Business Loan Fund, the arm of the R.I. Economic Development Corporation managing the funds and still experiencing a hangover from negative public perceptions of the 38 Studios LLC loan-guarantee debacle.
One of three organizations to receive a piece of the grant, the SBLF has struggled to find takers for its $2 million loan pool thanks to dwindling applications in the 10 months since 38 Studios collapsed.
With wholesale leadership changes in state economic development and a lawsuit against those involved in 38 Studios, many businesses apparently wrote the SBLF off.
“We went over four months without a transaction, starting last summer and going into the fall,” said Sean Esten, director of financial programs at the EDC. “We have been going to community forums and telling people we are open for business as usual. But it was tough to get the message out.”
In addition to the cost in opportunity of not utilizing its capital, the SBLF slowdown threatened to hold back the 2011 federal grant money due to the other two recipients, public venture capital Slater Technology Fund and the Betaspring startup accelerator.
Slater is the largest recipient of the grant, awarded through the Treasury’s State Small Business Credit Initiative, due $9 million out of the $13.1 million, with Betaspring due $2 million and SBLF the remainder.
To avoid holding Slater and Betaspring back, the SBLF has advanced them $1 million of $1.5 million it had planned to lend itself, against their total awards.
The federal grant was divided into three installments and to receive each, the state has to have used 80 percent of the previous one.

To make itself and the other two recipients eligible for the second tranche, the SBLF advanced $600,000 of its unused capital to Betaspring in November (completing the accelerator’s share) and $400,000 to Slater.
For the SBLF, a 27-year-old fund that has been self-sustaining since 1996, the current lack of activity is collateral economic damage from the failure of the $75 million 38 Studios loan guarantee, said Esten.
With the economy crawling out of the recession in late 2011 and early 2012, the SBLF was turning over three to five transactions every month and the program’s pool of available funds had dipped below $1 million.
Problems at 38 Studios became apparent last spring and engulfed the EDC, which put the deal together through its Job Creation Guaranty Program, leading to the ouster of Executive Director Keith W. Stokes and six members of its board of directors (George Nee is still serving pending the confirmation of a successor.)
Although the SBLF was not involved in the 38 Studios deal, it struggled to avoid the aura of scandal, which became a problem for a fund that relies on referrals from and partnerships with the financial community.
“A lot of partners and referral sources, such as CPAs and businesses we work with, thought we had shut down all the programs, which was not the case. But it was out there publicly, and it shut down transactions,” Esten said.
“Then as 38 Studios progressed, there was a reticence to have dirty laundry aired. Once that [happens] it takes a long time to fix,” he said.
In addition to the negative spotlight cast on anyone involved in 38 Studios, the state’s lawsuit against its former partners in the deal created fears in the business community that firms would think twice about working with the government.
The slowdown has impacted both the SBLF’s traditional loan program and financing through its share of the federal grant, which comes with its own set of lending standards and requirements.
The traditional SBLF program now has a $3.5 million balance of funds available to lend, up from $700,000 a year ago, a result of all the repayments coming in and hardly any new loans going out, Esten said.
The last time the fund saw that kind of balance was in 2009, when the recession caused creditworthy businesses to retrench.
The requirement for a traditional SBLF loan is a rejection letter from a private lender, but any investment using the federal funds must leverage 10-to-1 each loan with outside capital over six years.

Finding that private leverage hasn’t been a problem for Slater, which often invests in companies as part of much larger financing rounds, or Betaspring, which is mixing the federal funding along with the package of investments it makes in each startup.
Of its initial $1.5 million installment of federal money, the SBLF has so far used $300,000 in two deals.
The fund loaned $250,000 to executives of safety sign maker National Marker Co. in North Smithfield last May, so they could buy the company.
The other loan was $50,000 to Ocean State Psychotherapy in North Kingstown for operational capital, Esten said.
Because the SBLF’s $2.1 million share of the federal grant is only 16 percent of the $13.1 million total, the same strategy of moving funds to Slater and Betaspring could be used to get the third tranche.
Betaspring has already committed its funding and Slater, which just received its advance this month, has used its first $1.5 million. It is expected to put the additional $400,000 to work soon.
Betaspring’s $2 million in federal funding is being spread over 70 startups, said spokeswoman Melissa Withers, and the federal government is planning to feature the accelerator as a model use of the federal funds.
Slater Managing Director Richard Horan said his fund has had a “very active year” and sees significant investment opportunities in Rhode Island.
The second tranche of federal funding is expected to arrive around March, at which point Slater will have access to another slice of its $9 million total.
“Moving the funds over to Slater and Betaspring was a temporary move that made sense because they have opportunities to make that money work right now,” Esten said.
The SBLF’s goal for the federal grant is for it to become another self-supporting loan pool.
From negligible activity in the late summer, the SBLF now has six potential deals in the pipeline, about half the number Esten said he normally looks for, but a significant improvement. The quality of the applicants has also increased, Esten said.
“We are doing everything we can, networking and reaching out, to let people know we are here,” Esten said.

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1 COMMENT

  1. The EDC is a joke. These state employees have no clue what it’s like to be in the real world economy of RI. They sit in their ivory tower and “don’t want to compete with the banks”. They say they want to help grow RI businesses, but their credit terms are an insult. Five year amortizationa and 7.5% interest rates and you have to be turned down by a bank and pay $250 app fee for the privilege of applying for one of their stinking deals only to be turned down because the repayment is so onnerous that it wreaks havoc with your cashflow. I’ve just about had it with this stupid state, I’m serously considering moving my business to Seekonk or Swansea. Very Truly Yours, ERik C. Warner, President/Owner TJ Russell Supply, Bristol, RI employer of sever souls.