Public capital availability is real, but has shrunk

STREET LEVEL: Bill Ash, managing director of financial services at the R.I. Commerce Corporation, said that soon the agency will “have several million dollars out on the street working for the state of Rhode Island.” / PBN PHOTO/MICHAEL SALERNO
STREET LEVEL: Bill Ash, managing director of financial services at the R.I. Commerce Corporation, said that soon the agency will “have several million dollars out on the street working for the state of Rhode Island.” / PBN PHOTO/MICHAEL SALERNO

(Corrected, May 19, 4:35 p.m.)

Allan Tear, a co-counder and managing partner at the startup accelerator Betaspring, has seen firsthand how government can boost the economy by providing a little capital for private enterprise.
In recent years more than 30 entrepreneurs who have been through the Betaspring program took advantage of the Providence Economic Development Partnership Innovation Investment Program that before recent changes provided convertible loans to startups that pledged to stay in the city a full year.
“The program anchored companies in city for at least12 months, and it really served as the jump-start for creating critical mass for startups in Providence,” he said. “It’s an important tool to have in the mix.”
But such programs are also controversial. Critics charge elected officials are sometimes lacking business savvy, and that politicians have been known to use loan and grant programs to bestow favors. Those who make those arguments find plenty of ammunition in Rhode Island, where business programs run by the city or the state have been rocked by scandal in recent years.
The ugly headlines of recent years have prompted both the state and the city to rethink the ways in which they try to boost business. The loans and grants from public agencies have shrunk, and there’s more emphasis on providing technical assistance, rather than cash. But the programs have hardly disappeared. Both established companies and entrepreneurs can still hope for some government help, especially when hiring new employees for a high-growth enterprise.
The backlash in Rhode Island can be traced to the 38 Studios LLC debacle. In 2010, the state legislature approved the creation of a $125 million loan fund tied to growing employment in the state. The first major beneficiary of the program was former Red Sox star pitcher Curt Schilling’s fledgling video game company. Schilling had promised to bring 400 jobs to Rhode Island in exchange for a $75 million loan, but in two years time the company was bankrupt and its Providence office was vacant. Gov. Lincoln D. Chafee, a critic of the loan program before his election, vowed to overhaul the state’s Economic Development Corporation, the agency responsible for the loan. He was quoted as saying governments should attract businesses by boosting education and infrastructure, not by giving companies big handouts. Soon after taking office, Chafee shut down the job-guaranty loan program and made it clear that while the state would work to help companies secure funds, they were no longer in the business of making large-scale loans.
“We want to create the conditions that help companies thrive,” said Bill Ash, managing director of financial service at the R.I. Commerce Corporation, the successor agency to the EDC, overhauled by the General Assembly in the 2013 legislative session.
Ash is no stranger to the state’s business agency. Though he’s a newcomer in his current post, he was also part of the EDC staff back in the 1990s, and he sees the new focus as a return to that era. “Our policy is very similar to what it was 15 years ago,” he said.
The state still has two programs that lend money to businesses with plans for growth, one for small businesses and one for larger projects.
The Small Business Loan Fund can provide up to $250,000 to help companies upgrade existing manufacturing and processing services. Interest rates are fixed, and the loan schedule calls for repayment in five years. The same program can also provide financing for purchasing land, buildings or equipment, repayable in 10 years. Though the program is run by the state, the federal government provides the funding.
For every $50,000 a company borrows, it is expected to create at least one job.
There’s no shortage of companies applying for loans after a number of years of very little activity, a sign Rhode Island’s economy is improving, according to Ash. “We have about 12 applicants in the pipeline right now,” he said. “In the next few months we’ll have several million dollars out on the street working for the state of Rhode Island.” Larger companies are still seeking help from the R.I. Industrial Facilities Corporation. The agency issues tax-exempt bonds for companies planning manufacturing projects, with a limit of $20 million per project. The bonds can cover up to 100 percent of the cost for land, buildings and equipment. What’s more, building materials purchased for a project may be exempt from the state’s sales tax. Interest rates are determined by the market.
The RIIFC also offers taxable bonds for businesses that want to expand into a commercial enterprise, including hotels and other travel and tourism facilities. The limit per project is usually determined by the party purchasing the bonds.
Ash said the Small Business Loan Fund board recently approved a loan of $150,000 for a company that’s moving a laboratory to Pawtucket from a neighboring state, and three more companies are very near closing on loans.
Commerce RI also has a program to help companies make energy-saving improvements to their properties. “Our Renewable Energy Fund gives grants to companies installing photovoltaic panels on their rooftops,” Ash said. “You’re looking at about 60 percent of costs covered.”
Ash dismisses the notion that it’s difficult for businesses to obtain capital in Rhode Island, with or without state help. “There’s quite a bit of private capital here in this state,” he said. “Money will find its way here for worthy ventures.”
Companies looking for help with financing historically also could turn to the city’s PEDP. However, the program was the subject of a federal inquiry in 2012 for lax standards and poor results, which resulted in a suspension of activities until the end of last year.
It is now back to hearing applications for loans, although it has been caught up in the investigation of former R.I. House Speaker Gordon D. Fox over legal work he performed for the PEDP. WPRI has reported that Providence Mayor Angel Taveras said the city agency is not the target of the probe. Stuart MacDonald, assistant director of the PEDP, stops short of making the same claim, noting that investigators do not disclose such information. Like the state, the PEDP uses federal money for micro-loans and larger loans. Several years ago the city obtained $10 million from the federal Department of Housing and Urban Development to fund programs that boost the city’s economy. Of that amount, $1 million was set aside for arts and tourism programs, $1 million was set aside for microloans, and the rest was put into a fund that provides larger business loans.
The microloans were distributed through the Innovation Investment Program starting in late 2011. Thirty-three companies received $50,000 convertible loans (31 of them Betaspring graduates), for a total of $1.65 million. However, that was well more than the $1 million that was allocated, causing the city to suspend the program at the same time HUD was looking into the larger PEDP issues.
In April, however, the city approved new guidelines for the IIP microloans. Companies will receive $35,000, not $50,000. They must also pledge to remain in the city two years, rather than one. And while previous applicants were required to be working with Betaspring, Cherrystone Angel Group or the Slater Technology Fund, companies will be able to apply after pairing with other mentors who meet standards. The loans will continue to be convertable to equity.
MacDonald sees the microloans as a success to date. Some 35 companies received IIP loans; two have converted to equity, and the money borrowed from the city has been repaid. The companies receiving loans have created 74 jobs.
The PEDP is still distributing larger loans. In recent months the agency has provided funds for two Providence jewelry companies that both have been in the city for decades, MacDonald noted. •

A previous version of this article incorrectly stated that a loan approved by the Small Business Loan Fund had been approved by the RIIFC.

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